Los Angeles Multifamily Housing Market Challenges and Decline

Drop in L.A. Apartment Values

In 2021, developer Paul Schon sold a 14-unit Hollywood apartment building for $6.5 million. He recently repurchased it for $4.75 million, a significant decrease. This situation highlights the general decline in the L.A. multifamily housing market over recent years. Apartment building values in Los Angeles have suffered a notable decline, reflecting broader trends.

Market Trends and Challenges

Between 2022 and 2026, the average sale price per unit in multifamily buildings in Los Angeles County dropped from $397,289 to $280,591. The city faces a housing shortage, prompting the state to encourage building new homes, while Mayor Karen Bass has expedited the permitting process. Developers like Schon reveal that constructing new apartments is not currently viable.

Projects struggle to achieve profitability, and taxes cut into potential earnings. Developers are leaning toward smaller projects, such as accessory dwelling units (ADUs) and townhouses, instead of larger, denser developments crucial for addressing the housing crisis.

Impact on Developers and Tenants

Tenants continue to face high rents despite periodic decreases. Demand persists, and years of underbuilding mean housing remains expensive. Developers report a stall in productivity, contributing to renter challenges and limited opportunities for aspiring homeowners.

Construction Decline

Construction in the area has slowed down. According to Kidder Mathews, only 2,376 new apartment units were completed in L.A. County in the first half of the year, a near 9% drop from the previous year, with about 25,636 units under construction, down around 15%.

Executive vice president Darin Beebower stated that developers have paused activities, maintaining low construction rates.

Efforts to Address the Crisis

Mayor Bass’s administration has prioritized reducing bureaucratic barriers. Fast-tracked affordable housing efforts aim to mitigate the impact of a growing affordability crisis by expediting homeless shelters and affordable housing projects.

Paige Sterling, Bass’s spokesperson, highlighted multiple initiatives, including Executive Directive 1, which focuses on affordable housing solutions and expediting the process.

Interest Rate Impact

Developers cite rising interest rates as a primary factor impacting the market. Interest rates surged in 2022, affecting project margins. Borrowing at higher rates strains profitability.

Policy Issues and Taxation

The city and county’s tenant protection policies, introduced during the pandemic, continue to impact the market. Measures such as rent freezes and eviction moratoriums reduced revenues, hindering growth, even after expiration.

Measure ULA, a mansion tax introduced in 2022, levies 4% to 5.5% tax on property sales over $5.4 million, affecting apartment buildings and discouraging investment.

Developer Challenges

Developer Yoni Chriqui and others are reducing project scales to avoid taxation. Many are opting for smaller constructions, resisting factors undermining profitability.

Development strategies face additional hurdles due to rising costs, regulations, and fees. Providing park fees in addition to other expenses further complicates justification for multifamily projects.

Potential Solutions and New Policies

Density bonuses and incentives offer some relief but insufficient financial viability. SB 79 recently allows taller projects near transit stops, but no proposals exist under the bill in Los Angeles as of now.

Market Prospects

Despite recent losses, some investors remain interested in L.A.’s property market, with developments in trendy areas proving attractive, while those in less desirable locations are losing value.

Paul Darrow from Walker & Dunlop highlights buyer cautiousness but notes some interest due to value drops. Schon anticipates market stability and potential for growth, despite ongoing risks.

Chriqui emphasizes limited development viability on potentially large parcels, often resulting in reduced builds like single-family homes instead of originally planned multifamily units.