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Condo developers have officially returned to Downtown Los Angeles. Since the downturn, the market has been home to phenomenal multifamily development, driven by an amalgam of factors: employment—there are some 500,000 daytime jobs in the submarket—expanding public transit and entertainment destinations such as the Staples Center and L.A. LIVE. As a result, an increasing number of condo developers are breaking ground in the submarket, accounting for more than $1 billion worth of activity.

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According to a recent survey by the Downtown Center Business Improvement District, there are currently 10,000 multifamily units under development and 2,000 of those are for-sale condo units—but there are more than 4,000 units in the pipeline, and values are rising dramatically. A recent report from Polaris shows that the average price of a condo unit in Downtown Los Angeles is $493,000, the median in the city. Some reports show even more aggressive estimates of condo pricing. The Mark Co.'s condo pricing index shows that new development properties are selling at an average of $760 per square foot, having appreciated 14% year-over-year. By comparison, in the City of Los Angeles, the Polaris report shows that condo prices for low-rise buildings are averaging $535 per square foot, an annual increase of 9.8%, and midrise buildings are selling for an average of $565, a 14.4% annual increase. Condos in high-rise buildings are trading for an average of $623 per square foot, up 12.9% from a year ago.

The Mark Co. also tracks pricing for penthouses, which are appreciating just as rapidly. They now sell for an average of $1,230 per square foot, a 14% year-over-year increase and a 3% uptick from May to June.

Prior to the downturn, much of the multifamily development in Downtown Los Angeles consisted of condo projects, according to Rhonda Slavik, a director at Polaris. Through the downturn, as the for-sale home market bottomed out, most of those projects were converted into for-rent apartment units. As a result, there has been a flood of for-rent units under development in the market. “Now, there is a big demand for condos because there are so few in the market,” says Slavik.

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Part of the reason behind rental's popularity is that funding for these projects was significantly easier to secure—and it still is. The average rental developer can secure 70% to 75% loan-to-cost debt for construction, while a condo developer, because there is more of a downside, can usually secure about 50% loan-to-cost and the debt is typically more expensive. However, about 12 months ago, that started to change. As condo values began to rapidly appreciate, proving the demand in the market, and as the economy became more stable, lenders began to open up to condo developers. “People are making so much money on rentals,” says Slavik, “that the attitude is, why take the risk on these condos?

“That dynamic has started to shift in the past 12 months. Rentals are becoming a bit less profitable because inventory has seen such a run-up and rent rates are beginning to level off. With that, condo prices have really appreciated within the past two years, and now developers have started to look much more closely at a condo exit.”

As a result, many condo developments are getting the green light. “Developers are not having a problem getting projects financed any longer, and that has been going on for about a year,” says Slavik, adding that lenders are still being strict.

Most lenders have a very specific set of criteria. Projects getting the best funding have fewer than 300 units and will come to market in less than 24 months. Trumark Urban, the developer behind TEN50, a $110-million high-rise in the South Park district of Downtown, meets this criterion. The project has 151 units in 25 stories, and is expected to open in September 2016 after breaking ground in July 2015. Arden Hearing, a managing director at Trumark Urban, wouldn't disclose the exact amount secured for the project, but said that the figure landed somewhere between 65% and 70% loan to cost and was generally more expensive than the same capital that an apartment developer would secure.

Although more developers are opening up to the idea of condos, fewer lenders are willing to lend on these projects. Bryan Shaffer, a principal at George Smith Partners, explains, “There are more limited forces for condo development, but the difference is that five years ago, you couldn't get condo construction done and now you can. On the renovation side, there is definitely more capital available for converting buildings that were entitled for condos, but built as rentals, back into condos. There is definitely money out there for that.”

Hearing, however, adds, “The pool of capital, both debt and equity, is much smaller than the pool for rental housing. It is generally a more challenging effort to develop a condo property than a for-rent property. It has gotten better than it was 24 months ago, but it is still an uphill battle.”

Still, as more rentals come on line, condo developments begin to show a more attractive upside. Hearing says that the booming rental market—with loads of competition—was exactly what drove the firm to develop condos. “The capital markets have really begun flooding the sector. Rentals have been a favorite of institutional capital for many years, and it has resulted in an oversupply,” he says. “In Downtown Los Angeles, 80% of the cranes in the sky are building rental units. As a result, we are dramatically undersupplied in for-sale housing and, in that, we see an opportunity. Right now, if you wanted to buy a condo Downtown and move in this summer, you have nearly zero options. We like that.”

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Apartment developments Downtown account for about $3 billion, while condo projects account for about $1 billion, which Shaffer notes is still a very significant market share. Plus the condo developments under construction are major. They include: the $1-billion Metropolis project with office, hotel and condo components from Chinese developer Greenland USA; Oceanwide Plaza, a $1-billion development with 166,500 square feet of retail space and 504 luxury condo units from Chinese developer Oceanwide; a $750-million mixed-use project from Mack Urban and AECOM that will include 362 condos; and a$100-million development proposed by Chinese developer ShengLong Group earlier this year.

Even with so many condo projects breaking ground, Slavik isn't concerned about oversupply because the projects are all inherently different and target completely different demographics. “They are different price points and very different unit sizes, so there is not a lot of crossover,” she notes.

The undersupply is putting such upward pressure on pricing that Slavik expects the market to hit peak prices on new development condos soon. She imagines Los Angeles will follow a similar trajectory as the San Francisco market. “A year-and-a-half ago in San Francisco, we hit the peak of the last market, and now we are a little bit above that,” she says. “We're now seeing the same thing in Seattle, and it's what we  expect to see in Downtown Los Angeles. The peak of the last market in L.A. was about $730 a square foot. We are just below that on the resale and we expect to be above that on the new sale,” According to the Mark Co.'s pricing report for new development, we're already there.

Much of the condo development is centered in the South Park district and along the Figueroa corridor. While that area is closer to the Staples Center and L.A. LIVE, making it a more active and inherently valuable from a location standpoint, it's also the area with the most parking lots and therefore the most available developable land.

It isn't only new condo developers that are looking to cash in on the submarket's dramatic undersupply of condos. Investors have been scooping up projects that had been converted from condos to rentals during the downturn, and converting them back into condo properties. “After the market began to rebound after the downturn, you could really only get money to do rental projects. Everybody that had a condo project switched to rental, and over the years, we have started to see the flip back to condo projects as more capital becomes available,” says Shaffer. “We're even seeing developers buying multifamily projects to covert back to condos. We are also seeing a lot of the old retail projects and the old office projects becoming more creative office, and that has been a big buzz. It's a market in which lenders have really been interested, even the older, more traditional lenders.”

That isn't to say, however, that the rental market isn't still booming. Rentals still account for the vast majority of all Downtown development, and because there are so many jobs in the market and limited housing inventory, it isn't likely that there will be an oversupply issue when all of these new units come on line in the next few years. “There will always be a larger rental market, and the rents continue to increase across the board,” adds Shaffer.

Rental developments are seeing great success throughout Downtown. Late last year, developer McGregor Brown Co., backed by a joint venture led by Canyon Partners Real Estate, was the first developer to build ground-up apartments in the Arts District. The project has seen tremendous success. Within a year of opening, One Santa Fe is nearly fully occupied and the units—ranging from studio units to two-bedroom townhomes—are attracting market rents from $2,009 to $3,450.

“We observed a lot of great things happening in the Arts District, from adaptive reuse to live-work environments that were meeting strong demand, and through that we realized there was a lot of pent-up demand for quality residential,” relates Charlie Rose, senior director at Canyon Partners Real Estate. “We have been pleasantly surprised by the rental rates and by the rate of absorption that we've achieved at One Santa Fe. It's a reflection of how the community has received the project.”

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The project was several years in the making and has different metrics because it operates on a ground lease with the MTA. McGregor was originally attracted to the market because it saw the potential to complete the block that had housed the Southern California Institute of Architecture. “SCIARC was on one side of the street and two parking lots were on the other side. We thought it was an ideal location to do an iconic project that would take those two book ends and complete that entire stretch,” says Bill McGregor, development manager of McGregor Brown Co. “With the vibrant, emerging downtown market and this ideal site, we decided to do something there.”

Rose and McGregor have also noticed the increase in condo developments. “For the first time in many years, developers are buying land with a for-sale exit plan, building for-sale housing as opposed to rentals,” says Rose. Some tenants at One Santa Fe are renting residences as a second home—a pied-a-terre of sorts. This demographic has limited options for condos, and has turned, in some cases, to rental options like One Santa Fe.

Currently, Metropolis is the only new condo project with units available for sale; other developments under way have not yet come to market. Metropolis' condos are selling for between $580,000 for some studios and up to $1.9 million for a two-bedroom unit, according to the website. As of June, there were only 155 Metropolis units—the project has had an average absorption of 38.9 units per month—on the market, and 91 active resale listings. That is a 2.2-month condo inventory. Los Angeles in general has a 3.2-month condo inventory, which shows the shortage of product in Downtown.

Slavik expects this upward momentum to continue for the next few years. “The market will continue to appreciate over the next 24 months,” she says. “We see that the economic dynamics across the country are good and there is a lack of inventory. The next couple of years are a no-brainer, it's secure for boutique-sized developments in Downtown L.A.”

Hearing, agrees, saying, “As long as the economy stays reasonably strong, we don't see any reason for condo pricing not to continue its upward trend.”

As more condo units come on line to fill the limited supply—and high demand—prices may fluctuate, although Slavik contends that an increase in supply will have only a minor and likely temporary impact on pricing. Regardless, market conditions are strong enough to entice developers to break ground. It's clear that condo developers are back in full force Downtown.