Annual Activity in the California Area Lowest Since Early 2013
By Ryan Patap
CoStar Analytics
April 4, 2024 | 1:42 P.M.
In the first quarter of 2024, Los Angeles County only saw about 1,600 starts on market-rate apartment units. These limited groundbreakings continued a multi-quarter pattern, fostering a narrowing pipeline that could set the stage for a competitive and pricey multifamily rental market in the California locale.
Over the last four quarters, developers broke ground on just about 7,200 units in Los Angeles County — the region's lowest level on a four-quarter basis since early 2013. One of these groundbreakings included the sizable Paseo Marina, a 425-unit residential project in Marina Del Rey. Even this project, however, exemplifies the difficulties of building in the LA metro area.
Sares Regis Group, Paseo Marina's developer, originally proposed a 658-unit complex on the site in 2016. After former Los Angeles City Council Member Mike Bonin opposed the project's scale, Sares Regis shrank the project to 425 units.
As a result of moderating construction starts, the number of units under construction sits slightly above 23,000, a dip from the 26,000 units underway at the end of the first quarter of 2024.
Rising debt costs are largely driving this decrease in apartment starts, as the rise impedes developers’ ability to secure financing at terms that make financial sense to achieve targeted returns. Cooler tenant activity in 2023 led to rising vacancies that also likely contributed to developer hesitation.
Construction activity is also likely hampered by additional transfer taxes recently imposed on residential and commercial property sales in the city of Los Angeles, which contains more than half of the county's market-rate units.
Sellers in Los Angeles now face an extra 4% transfer tax for any sale above $5 million and 5.5% for any sale above $10 million. The increased levies could suppress long-term development activity given that developers — who typically create apartment complexes and own them for a shorter period of time — now need to underwrite this additional cost.
If lower levels of starts persist, the Los Angeles apartment market could see a shortage of new units by 2025. If the market is in recovery mode, landlords could quickly gain the upper hand again over renters.