CityView and California Landmark Group, which develop market-rate projects, cited issues such as the new real estate transfer tax, Measure ULA, which went into effect in April, and other city regulations such as the decarbonization ordinance passed last year and state-level requirements about rent increases.
“One of the projects that we’re currently entitling in Los Angeles, when we look at the potential exit valuation and the impact of ULA, it’s going to be anywhere from an $18M to $20M hit,” Adam Perry, CityView partner and senior vice president of development and construction, told an audience at Bisnow’s Los Angeles Construction & Development Conference at The Biltmore Los Angeles hotel last week.
“It just makes it very difficult and challenging to get projects approved and to underwrite them in the city of Los Angeles right now,” Perry said.
As a result of all these obstacles, Perry said his company is looking on “the periphery” of Los Angeles for new opportunities.
He listed pockets of Hawthorne and Gardena, as well as Burbank, Glendale, Pasadena and West Hollywood, as areas of interest that were more “business-friendly.” At the state level, new regulations both passed and pending — such as potential attempts to repeal Costa-Hawkins, the state law that governs rent control of multifamily units — are of concern, panelists said. The new regulations also come on top of broader complications resulting from higher interest rates and a more challenging lending landscape.
California Landmark Group leadership echoed some similar concerns and was also exploring alternatives outside the city of LA. CLG has about 2,500 units under management, with about 500 under construction and approximately 900 in entitlement, but after those projects are complete, the pipeline “very quickly falls off a cliff.”
“There’s no way to make sense of developing in Los Angeles right now,” California Landmark Group principal Ari Kahan said. “Especially if your capital needs to exit.”
Affordable housing developers don’t seem to be faring much better, either, though they face a different set of challenges.
“Everybody always tells me, ‘My God, you must be doing great. There’s such a need for affordable housing in this homelessness crisis,’” Wakeland Housing President and CEO Rebecca Louie said.
But funding sources offer different amounts every year, and this year and next look dire at the state and local levels, Louie said.
Pending legal challenges to Measure ULA and a proposed ballot measure that could invalidate it may slow the disbursement of funds. Even if the projected hundreds of millions of dollars from the tax materialized — money that was supposed to help fund affordable housing — the city isn’t free to spend it all because if the city ultimately lost any of those challenges or if the ballot measure passed, it could be forced to repay the money.
Louie pointed to an analysis published this month by the Los Angeles Business Council that found that projects took nearly four years to complete on average, including an average 18 months spent securing approvals. Louie said that if the study, which analyzed all permitted multifamily projects in Los Angeles from 2010 to November 2022, focused on just the last three years, it would find dramatically longer timelines.
Los Angeles is a very challenging place to develop affordable housing, she said.
“Everything takes a long time,” Louie said.