Introduction to the Crisis
Los Angeles developer Cliff Goldstein just completed a plush new apartment complex on the Westside, but that’s the last one he’s going to build for the foreseeable future. Even though demand for housing in the region is red hot, many people who build apartments for a living have paused putting shovels in the ground because, they say, it’s just too hard to turn a profit. “It’s a needle in a haystack to find an opportunity that makes financial sense to build today,” Goldstein said.
The Decline of New Apartment Construction
Ari Kahan used to have multiple projects with as many as 800 total units being built in Los Angeles at any given time. No more, he says. “We haven’t bought a site with the intention to develop it in over two years,” he said. “I don’t know when we will be building in L.A next.” The supply of fresh rental units, which make up the bulk of new housing in Los Angeles, is petering out despite robust demand. The vacancy rate is among the lowest in the country, while rental rates are among the highest nationwide.
Current State of Apartment Construction
Still, the number of new units under construction in Los Angeles has been falling each quarter since early last year and is set to dive to a more than 10-year low, according to real estate data provider CoStar. Under 19,000 apartments were under construction in the three months through September. That’s 30% fewer than three years earlier, according to CoStar’s count.
Challenges Faced by Developers
Developers say they can’t raise the money they need to build as many of their biggest backers — think pension funds, insurance companies and other institutions looking for long-term investments — don’t want to park their money in L.A. because the rapidly changing rules make it impossible to predict profits. The years since COVID-19 have demonstrated how tangled regulation of the industry can get in L.A., observers say, so investors are taking their money to other cities. “L.A. has been redlined by the majority of the investment community,” said Kahan, a principal of California Landmark Group.
Impact of Policy Changes
Recent policy out of Washington also hasn’t helped. Higher tariffs have sparked rising prices in construction materials and equipment, while the crackdown on undocumented workers has thinned and spooked much of the international workforce the industry depends on. “Prices rose at an especially rapid pace in some of the categories most affected by tariffs,” including iron and steel prices, which have risen 9% in the last year, and copper wire and cable prices, which have jumped 14%, said Anirban Basu, chief economist of trade group Associated Builders and Contractors.
Labor Shortages in the Construction Industry
California’s construction industry depends on immigrant workers. Around 61% of construction workers in the state are immigrants, and 26% of those are undocumented, according to a June report from the Bay Area Council Economic Institute. “Finding construction labor was hard before, and now it’s even harder,” economist Richard Green said. Green, who is director of the USC Lusk Center for Real Estate, said findings from a new USC project that collects housing data on Los Angeles County neighborhoods illustrate the problem.
Historical Context of Housing Production
Housing production in Los Angeles County has slowed dramatically over the decades, dropping from over 70,000 new units annually in the 1950s to roughly 30,000 in the 1970s and 1980s to less than 15,000 in the 2010s. This long-term slowdown in housing construction has left the region with an older, more strained housing stock and a deep shortfall in affordable options, USC said. With little urban land left for single-family subdivisions, most new housing is rental apartments. Over the last six years, around 152,000 new units were built in Los Angeles County. The vast majority of those were rental units, and only 10% were affordable to lower-income households.
Regional Comparison
Southern California stands out even among sharp nationwide declines in apartment production, according to HomeAbroad, which helps foreign investors buy U.S. real estate. The number of multifamily building permits issued in the Los Angeles-Long Beach-Anaheim metropolitan area in July fell 68% to 556 compared to the same month in 2020, HomeAbroad said. It was the second biggest drop in the country after the Silicon Valley area of San José-Sunnyvale-Santa Clara.
Investor Concerns and Future Prospects
Among investors’ concerns are public policies such as the United to House Los Angeles transfer tax on large real estate sales, and also temporary limits on evicting tenants that were enacted during the pandemic. “They’re fearful of what policies might come down later,” said Goldstein, a co-founder of GPI Cos. Still, some are looking for deals to be ready to build when the environment is better. “There is a lot less competition and prices have come down substantially” on some types of properties, said Jordan Lang, president of McCourt Partners. “We’re viewing this as a time to buy multiple land sites to be ready for this next cycle.”
Conclusion
The decline in new apartment construction in Los Angeles is a complex issue, driven by a combination of factors including changing regulations, labor shortages, and investor concerns. While some developers are looking for opportunities to build when the environment improves, others are pausing their projects due to the uncertainty. The current state of the market is characterized by high demand, low vacancy rates, and rising rental prices, making it challenging for developers to turn a profit. As the city continues to grapple with the housing crisis, it is essential to address the underlying issues and create a more favorable environment for developers to build affordable and sustainable housing.
FAQs
Q: Why are developers not building new apartments in Los Angeles?
A: Developers are not building new apartments in Los Angeles due to a combination of factors, including changing regulations, labor shortages, and investor concerns, making it challenging to turn a profit.
Q: What is the current state of the apartment market in Los Angeles?
A: The current state of the apartment market in Los Angeles is characterized by high demand, low vacancy rates, and rising rental prices.
Q: How has the construction industry been affected by recent policy changes?
A: Recent policy changes, such as higher tariffs and the crackdown on undocumented workers, have led to rising prices in construction materials and equipment, and a shortage of labor in the construction industry.
Q: What is the historical context of housing production in Los Angeles County?
A: Housing production in Los Angeles County has slowed dramatically over the decades, dropping from over 70,000 new units annually in the 1950s to less than 15,000 in the 2010s, leaving the region with an older, more strained housing stock and a deep shortfall in affordable options.
Q: How do investors view the Los Angeles market?
A: Investors view the Los Angeles market as high-risk due to the rapidly changing rules and regulations, making it challenging to predict profits. As a result, many investors are taking their money to other cities.
