What You Need to Know From Your Developer Partners

LOS ANGELES—Supply chain delays that impact timetables, labor shortages and their stronghold over productivity, and inflation, to name a few, have all caused unprecedented inventory shortages, but developers have learned to be nimble and resilient. 

Panelists who spoke on Tuesday at the GlobeSt. Multifamily National Conference at the JW Marriott LA LIVE have continued to give rise to unforeseen opportunities in untapped markets, while at the same time, have navigated many day-to-day challenges. According to moderator Kitty Wallace, senior executive VP at Colliers, “Multifamily has been a brighter spot than most.”

HOT OR NOT/?

Panelist Nick Gonzalves, director of acquisitions, development and opportunity zones at Bridge Investment Group, has been studying how rents have been trending. “Non-coastal western markets have started the steepest rental decline on the west coast with places like Phoenix and Sacramento leading the pack.” He added that Los Angeles and San Diego have performed pretty strong. Across the company’s national funds, they are seeing the most activity on the east coast markets in places like DC and Florida. “For me, west of the Mississippi is pretty tough.”

Jared Brenner-Goldstein, managing partner of acquisitions and development at Canfield Development Inc., who has traditionally focused on Los Angeles, said that there was a long period of time where investors focused on super cities. That seriously shifted during Covid to where the people are and want to be, he said. “25% of the people are coming into the office full time, 50% are on a modified schedule and 25% are not coming into the office and may never come again,” he said.

With the migration of where people want to live, his firm is doing more suburban development than ever before. “It has diversified the kind of things we are developing.”

Ari Kahan, principal of California Landmark Group, said that with where construction costs are and where rents are, is also looking in some other markets… not to develop, but to, instead, acquire distressed assets. “We are patiently waiting for those opportunities.”

Kahan noted places like Utah, where there is a lot of native migration, or Denver, Colorado. “We are staying away from Texas right now,” he added.

The cities that will help the mission of Rochelle Mills, president and CEO at Innovative Housing Opportunities, are where the dollars are. “We believe very strongly that mixed-use buildings make the most sense,” she said. “We are a non-profit but that doesn’t mean we want to be unprofitable. We are based in Orange County, but the money is also following the transit and OC hasn’t been the transit.”

Mills explained that Innovative Housing tends to put its projects around the transit in Los Angeles. “We have great incentives as 100% affordable but it comes with a lot of strings attached.”

Those strings, she said, include things like auxiliary space that goes with social services, community rooms, labor costs, and community engagement, to name a few. “It really does add a lot of costs.”

LEGISLATION IN THE WAY?

One huge legislative challenge on the horizon that could make it harder for the merchant builder, according to Kahan, is the mansion tax. “It is a terrible thing.”

According to a city analysis, the “mansion tax” would impose an additional tax on commercial and residential property sales that exceed $5 million. The ballot measure would generate an estimated $600 million to $1.1 billion a year.

“The City always gives you something and takes something away,” Kahan continued. “They give you density, they take away height.”

Another reason we have a housing crisis, at least in California, according to Kahan, is CEQA. “Every funding source doesn’t want to get rid of CEQA. There are no major groups ready to oppose CEQA.”

Brenner-Goldstein pointed out that most developers are not optimistic about CEQA reform. “The neighbors can favor your project now, but the city can’t get out of your way…CEQA is still making things difficult.”

CREATIVE SOLUTIONS

There is also some great legislation out there, added Mills. “What I find with all of the legislation, those that allow you to take single-family lots and allow you to convert them, for example, is the recognition that housing is required to turn around cities.” According to Mills, community reinvestment and better health outcomes start with having stable housing. 

“There is an incredible need for affordable housing,” she said, adding that now is the time to put on our thinking caps. “When we are looking at developing housing, we are looking at creative ways to create jobs…things like affordable housing co-located with grocery stores or co-located with boutique hotels. If we don’t get creative, we have missed the mark. We have to find a win-win.”

BUILD TO RENT CHALLENGES

Gonzalves is also dabbling in build to rent, but notes that it presents its own set of challenges. “Build for rents have two options. One with a multifamily developer who is building single-family housing that isn’t their bread and butter, or you are going with a single-family developer… There are some hiccups either way,” he said.

Most of the issues are surrounding how to mitigate risk. “I try to work with the home builders and insurance companies so we are able to cover ourselves.”

Land is also a problem and is expensive. “It is starting to come down though,” he said. “Just last week I got a rebid on one of our single-family build projects and costs came down 18%. But then I got another bid on a Denver project and costs went up 13%. It is all over the map.” 

Check back with GlobeSt.com for more from this event and click below for stories you might have missed on the subject.

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