Interest rate hikes clog LA multifamily pipeline

Southern California needs housing but new construction of multifamily projects has tilted in the wrong direction.

That conclusion is drawn from a recent Kidder Mathews report that showed new multifamily construction in L.A. County plunged by nearly half in the first quarter of this year compared to the same period a year earlier.

The report, published this month, counted 1,826 new construction projects that got underway in the first three months of 2022 — down from 3,418 for the same period of 2021, a 47 percent drop. The first quarter figure was down by about the same rate compared to the prior three months: In the fourth quarter of 2021 Kidder Mathews counted 3,426 new multifamily construction projects in L.A. County.

The drop, said Jim Kruse, a regional president with Kidder Mathews, reflects a more cautious mindset among developers in response to a period of exceptional turbulence, as interest-rate hikes begin to ripple through a marketplace already dealing with supply shortages, a tight labor market and the lingering effects of the pandemic.

“The headlines are always going to stop or propel people, and interest rates started creeping up a little bit,” Kruse said. “Everything went through literally a sea change … and I think that there were a lot of these builders who said, ‘Hey, maybe I’m going to [wait and] start my project next quarter,’ and rightly so.”

At the same time, developers are also still affected by supply chain problems and high labor and construction costs, factors that have complicated building across the country for months. Those costs can take on a magnified effect in L.A. County, where margins are often tight because of high land prices and rigorous state and local approvals processes.

The dramatic decline in new projects getting started in L.A. is “not driven by demand — there’s more demand than ever,” said Sean Burton, the chief executive of the large L.A. multifamily developer Cityview . “It’s just about the challenges of finding a site, taking it through an entitlements process — which is a challenge in a lot of L.A. County — and dealing with rising finance costs and rising labor costs, as well as materials.”

“It should be a call to action,” Burton said of the Kidder Mathews report. “If I were an elected official I’d look at this and say, ‘Hey, we’re not doing our part. So we’ve got to get to it and find ways to get more housing built, denser housing, and more quickly.’”

Construction of multifamily hasn’t dried up in Los Angeles County: Kidder Mathews counted 32,443 multifamily projects under construction in the first quarter of 2022, up from 30,735 for the same period a year earlier. Kruse also predicted that future reports would show the pace of new building once again quickening, as developers find ways to meet Southern California’s persistently strong demand for more units.

“Los Angeles needs more housing, and there are people that are willing to go out there and take the risk and supply that housing,” he said.

But the past few months’ lack of new construction filling the pipeline doesn’t bode well for Californians who already face some of the country’s highest rents: The average asking rent on an L.A. County apartment unit for the first quarter of 2022 was $2,079, up about $140, or seven percent, compared to the first quarter of 2021, according to the report. Vacancy rates also fell from 5.4 percent to 3.3 percent.

Kidder Mathews also tracked the county’s largest newly completed multifamily construction projects, as well as the largest under construction and the biggest deals completed. The quarter’s largest completed project was The Landmark, a 376-unit building by Douglas Emmett in West L.A. that was finished in March; the largest project under construction was Ferrante, an 1,150-unit building by G.H. Palmer Associates near Downtown L.A.; and the largest deal was Waterford Property Group’s $280 million purchase of the Westgate Apartments, in Pasadena, from Equity Residential.

“Those are beautiful projects,” Kruse added, referring to builds underway from Palmer and Hines. “The quality is certainly out there.”

Read more

Los Angeles

Beverly Grove strip mall set for apartments

Los Angeles

Englanoff switches to multifamily, eyes Little Armenia