New legislation and rising land and construction costs in L.A. are making developers think twice on new apartment starts, according to Steve Fifield, co-founder and principal at Century West Partners. Since Measure JJJ passed in November 2016, Century West Partners has not purchased a land site since the ordinance passed, and next year, it expects development will continue to slow. We sat down with Fifield to ask him about apartment development in L.A., his outlook for next year and why new legislation meant to encourage development is actually impeding it.
GlobeSt.com: Do you expect apartment construction to slow down next year?
Steve Fifield: Apartment construction started slowing down this year. It isn't something that is going to happen in the future. It has already started. It is slowing down for several reasons. First, the banks are being more selective. They aren't lending as aggressively as they were before. If you don't have an A location, they will usually pass, and today, loans are more like 55% to 60% loan to value on construction deals. That means that you have to put in more equity. Secondly, land and construction costs in the last year have sky rocketed. Land prices have doubled in virtually all L.A. submarkets. As a result, you see some developers with land sites with entitlements that have appreciated so much that it was a better deal to sell without building the property.
The other thing that is really critical is Measure JJJ. The JJJ ordinance is a disaster for the development community. The City Council and the Mayor thought they were doing something good to create more affordable housing in L.A., and we need more affordable housing in L.A. The problem is that they over reached. Requiring 20% inclusionary affordable housing and then union labor. We cannot absorbed that cost. Century West Partners has not purchased a parcel of land since they passed Measure JJJ. We have gone more than a year without any land acquisitions, and we aren't the only one. With rising land prices, our development costs have moved up well beyond $400,000 per unit, and Measure JJJ has added another $60,000 per unit.
GlobeSt.com: We have seen a development boom in the last couple of years.
Fifield: We have 14 high-income submarkets. Of those submarkets that justify new construction, you can only get approvals for significant new buildings in four of them. They are Downtown Los Angeles, Koreatown, Hollywood and the Tri-Cities market. Everywhere else, you might see a crane or two here or there, but there isn't significant development. West L.A., for example, could take 5,000 units and absorb them in a couple of months, but the City Council and neighborhood groups are against development. There is demand for housing in L.A. that is always coming up short. The demand is higher than the supply. The areas that allow development are picking up the slack for the entire L.A. area.
GlobeSt.com: Have you seen a similar issue in any of your other development markets?
Fifield: Chicago just did the same thing effective November 1st, and virtually every developer that had a contract on a site has dropped all of its option. So, we are seeing this play out in other markets. Politicians think that they are going to create more affordable housing and creating union jobs, but really, this is reducing the number of all jobs.
GlobeSt.com: Will Measure JJJ keep you from developing here at all?
Fifield: No. It just makes us look for sites that are not impacted by this. Measure JJJ only affects sites that are being up-zoned. The sites that need up-zoning and high-density bonuses are basically shut down now. However, the sites that already have zoning and entitlements are good. We are still perusing deals in L.A., but it is much harder to make a deal pencil today. The amount of development is falling dramatically because of these headwinds. We are asking ourselves how much did we start in the last three years and how much do we expect to start in the next two years. The answer is somewhere between 25% and 50% for the next two years. That is a dramatic change.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Kelsi Maree Borland
