Introduction to the Problem
Multifamily developers are slamming the brakes on projects across Los Angeles, despite high demand and some of the most-expensive rental rates in the country.
A roller-coaster of development regulations in the past five years has caused lenders like pension funds and insurance giants to turn their backs on financing L.A. projects, the Los Angeles Times reported.
Measure ULA, the law that levies additional taxes on real estate sales above $5 million, has been another obstacle that many developers either can’t or are unwilling to overcome.
“L.A. has been redlined by the majority of the investment community,” Ari Kahan, principal of California Landmark Group, told the outlet.
The city’s apartment vacancy rate is among the country’s lowest, and rental rates are among the highest. Even so, the number of units under construction in Los Angeles has been in a free fall since early last year, approaching a decade low.
Fewer than 19,000 apartments were under construction in the third quarter, a 30 percent drop from three years ago, per CoStar.
“It’s a needle in a haystack to find an opportunity that makes financial sense to build today,” developer Cliff Goldstein told the Times. “A developer without investors would be like a king without clothes. I am an optimistic developer who wants to develop, but the investment community won’t participate.”
The Impact on Developers
Developers have shelved projects and taken their business to other municipalities.
“We haven’t bought a site with the intention to develop it in over two years,” Kahan told the outlet. “I don’t know when we will be building in L.A next”
The Real Deal’s Building Back L.A. roundtable revealed similar sentiments last month.
“Buyers and sellers are absolutely disgruntled over ULA, and it is not going away. It’s actually getting worse every day,” said Aaron Kirman, CEO of Christie’s International Real Estate Southern California. “It’s the crux of the issues today when we’re selling anything residential, even commercial, it comes up and it really has probably stopped 50 percent of the deals, maybe even more.”
Understanding the Regulations
Cityview CEO Sean Burton said city council members and other officials don’t get that Measure ULA is a problem for housing production.
“They think it’s interest rates. They think it’s ICE raids. They think it’s tariffs,” he said. “They don’t believe that it’s slowing housing. And we’ve been working to provide data [to show that].”
The latest wrench is the Los Angeles City Council’s study on increasing the minimum wage for residential construction workers.
Related News
How LA’s top agents are navigating Measure ULA
LA City Council eyes wage hike on multifamily projects
Measure ULA drives developers out of LA
Conclusion
The situation in Los Angeles highlights the challenges that developers face when regulatory environments become too restrictive. With lenders hesitant to finance projects and developers looking elsewhere for opportunities, the city’s housing market may suffer. It is essential for city officials to reconsider the impact of regulations like Measure ULA and work towards creating a more conducive environment for development.
FAQs
Q: What is causing apartment developers to shy away from Los Angeles?
A: A combination of development regulations and laws like Measure ULA, which levies additional taxes on real estate sales above $5 million, are deterring developers.
Q: How has the number of apartments under construction in Los Angeles changed?
A: The number of units under construction has dropped by 30 percent over the past three years, with fewer than 19,000 apartments under construction in the third quarter.
Q: What do developers think about the current situation in Los Angeles?
A: Developers like Ari Kahan and Cliff Goldstein express frustration and optimism, stating that it’s challenging to find opportunities that make financial sense to build today.
Q: Are there any potential solutions to the problem?
A: City officials could reconsider the impact of regulations like Measure ULA and work towards creating a more conducive environment for development.
