LA’s Apartment Puzzle: Why New Builds Have Stalled

Los Angeles is currently facing a significant paradox: despite an undeniable “red hot” demand for housing, new apartment construction has plummeted to a decade-low. This dramatic slowdown leaves many Angelenos wondering why developers are reluctant to put shovels in the ground, especially with rental rates among the highest nationwide.

The Stark Reality: A Retreat in New Construction

The pipeline for new rental units in Los Angeles is rapidly shrinking. While the region boasts one of the lowest apartment vacancy rates in the country, the number of new units under construction has consistently declined each quarter since early last year. This trend is expected to reach a more than 10-year low, with fewer than 19,000 apartments under construction through September of this year – a stark 30% reduction compared to just three years prior, according to real estate data provider CoStar.

A Historical Perspective on LA’s Housing Production

This slowdown isn’t an isolated event but rather the intensification of a long-term decline in Los Angeles County’s housing production. Over several decades, annual new unit construction has dramatically decreased, leaving the region with an aging and increasingly strained housing stock. This persistent underproduction directly contributes to a deep shortfall in affordable housing options for local residents.

Why Developers Are Hitting Pause

For prominent developers like Cliff Goldstein, who recently completed what he states will be his last apartment complex for the foreseeable future, achieving profitability has become exceptionally challenging. “It’s a needle in a haystack to find an opportunity that makes financial sense to build today,” Goldstein remarked. Similarly, Ari Kahan, who once managed multiple large-scale projects, hasn’t acquired a new development site in over two years, noting that “L.A. has been redlined by the majority of the investment community.”

Investor Reluctance and a Tangled Regulatory Environment

A major deterrent is the unwillingness of large institutional investors – such as pension funds and insurance companies – to commit capital to Los Angeles projects. They cite the city’s rapidly changing and complex regulatory landscape, which makes it nearly impossible to predict long-term profits. This uncertainty leads investors to divert their funds to other cities perceived as more stable and predictable.

Rising Costs and Workforce Challenges

The cost of building in LA continues to escalate, further eroding potential profit margins. Federal tariffs have caused significant price hikes in crucial construction materials and equipment; for instance, iron and steel prices have risen 9% in the last year, while copper wire and cable jumped a substantial 14%. Additionally, the construction industry heavily relies on immigrant workers. Increased crackdowns on undocumented labor have both thinned and “spooked” this essential international workforce, making it increasingly difficult and costly to find reliable construction labor, as noted by economist Richard Green of the USC Lusk Center for Real Estate.

Local Policies Adding to the Pressure Cooker

Several local policies further complicate the development landscape, adding layers of cost and uncertainty:

• United to House Los Angeles Transfer Tax: This tax on large real estate sales introduces a substantial and unpredictable cost factor for developers.
• Pandemic-Era Eviction Limits: Temporary restrictions on evicting tenants, initially enacted during the pandemic, have created concerns among developers regarding landlord flexibility and potential investment risks in the long term.
• Proposed Minimum Wage for Construction: Two LA City Council members recently introduced a motion to study establishing a $32.65 per hour minimum wage for construction projects with 10 or more residential units under 85 feet in height. This proposal also includes an additional $7.65 per hour healthcare credit, which would dramatically increase labor costs for builders.

What This Means for Los Angeles Renters

The consequences of this development slowdown are profound for LA residents:

• Unaffordable New Rents: With current construction costs, new apartments often demand rents between $4,000 and $5,000 per month, pushing the necessary annual income for tenants into the $120,000-$150,000 range. This makes new housing inaccessible to a vast majority of the population.
• Limited Affordable Options: Out of the approximately 132,000 new units built in Los Angeles County over the last six years, only about 10% were designed to be affordable for lower-income households, exacerbating the existing crisis.
• Longer Commutes: As fewer new homes become available within central areas, residents are increasingly forced to move to more distant communities, leading to longer and more stressful commute times.

A Glimmer of Hope? Future Prospects

Despite the prevailing pessimism, some developers are positioning themselves for a future rebound. Jordan Lang, President of McCourt Partners, views this challenging period as a strategic opportunity. His company is actively acquiring multiple land sites, aiming to be “ready for the next cycle” when institutional capital is anticipated to return to the market within six months to three years. For example, McCourt Partners has joined Lincoln Property Co. to take over and redesign a proposed apartment complex on Jefferson Boulevard in Culver City, with hopes of commencing work next year, contingent on a more favorable investment climate.

Frequently Asked Questions About LA’s Housing Market

• Why are investors hesitant to fund new apartment projects in LA?
  Investors are shying away from Los Angeles due to the rapidly changing and often unpredictable regulatory environment. Major institutional backers like pension funds and insurance companies find it impossible to forecast profits, leading them to redirect their capital to other cities with more stable policy landscapes.
• How much would new apartments cost to rent in LA?
  Due to high construction costs, developers estimate rents for new units would need to be between $4,000 and $5,000 per month. This implies that tenants would need to earn an annual income of $120,000 to $150,000 to afford these new units.
• Is LA’s decline in construction unique nationally?
  While apartment production is declining nationwide, Southern California, and specifically the Los Angeles-Long Beach-Anaheim metropolitan area, stands out significantly. This region saw an alarming 86% drop in multifamily building permits in July compared to the previous year, marking the second largest decline in the U.S. after Silicon Valley.
• How do tariffs and labor shortages affect building costs?
  Federal tariffs have driven up prices for essential construction materials like iron and steel (up 9%) and copper wire and cable (jumped 14%). Concurrently, crackdowns on undocumented workers have reduced the available labor pool, making it harder and more expensive to secure a workforce for projects.

The future of Los Angeles’ housing affordability and availability hinges on finding a crucial balance between robust demand, sustainable development policies, and a stable investment climate. For residents, understanding these factors and advocating for clear, consistent housing policies will be vital in addressing the city’s ongoing housing crisis.

LA apartment construction hits decade low