Annual Construction Starts in Region Lowest Since Early 2013
By Ryan Patap
CoStar Analytics
July 11, 2024 | 11:43 AM
As developers respond to uncertain financial conditions and moderating tenant interest, Los Angeles County only saw construction start on around 500 market-rate units in the second quarter of 2024. This slowing multifamily building, however, could give renters fewer options in the years to come.
During the past four quarters, construction began on around 6,300 units in L.A. County, the area's lowest level of starts on a four-quarter basis since 2013. That construction does encompass some substantial development, including Sagewind Ranch, a 172-unit, single-family property in the northern city of Lancaster by Foremost Pacific Group. Residences are designed to range from about 1,000 to 1850 square feet and have two, three or four bedrooms.
Despite developments such as Sagewind Ranch, L.A.'s 22,000 units under construction have moderated in recent quarters from just over 27,000 units underway in early 2023. The ramp-down multifamily housing underway indicates that construction levels will likely moderate further in the near term.
That moderation in apartment starts is primarily driven by the rise in debt costs, which have impeded developers’ ability to secure financing at terms that make financial sense to achieve targeted returns. Last year’s cooler tenant activity led to rising vacancies, which also likely contributed to developer hesitation.
Construction activity is also likely hampered by additional transfer taxes — also called the mansion tax — on residential and commercial property sales that the city of Los Angeles imposed in April 2023. According to the levy, sellers in Los Angeles face an extra 4% transfer tax for any sale above $5 million and 5.5% for any sale above $10 million.
Over half L.A. County's multifamily units sit within the city, so the tax could suppress its long-term multifamily construction. Developers, who typically spearhead apartment complexes but own the property for only a short period, now need to incorporate this additional cost into underwriting.
If lower levels of construction 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 gain the upper hand again over renters.
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