Challenges in L.A.’s Multifamily Housing Market

Decline in Property Values

In 2021, Paul Schon, a developer, sold a 14-unit apartment building in Hollywood for $6.5 million. Recently, he reacquired it for $4.75 million. This transaction highlights a significant drop in property values within Los Angeles. Over five years, the average price per unit for multifamily buildings in L.A. County decreased from $397,289 in 2022 to $280,591 in 2026.

Challenges in Housing Development

Los Angeles faces a housing shortage, despite the need for more homes. Efforts by the city, such as the implementation of a faster permitting process by Mayor Karen Bass, aim to encourage development. Yet, builders like Schon find it difficult to pursue new apartment projects. Current projects struggle to be viable due to high costs and low returns.

Developers opt for smaller projects, including accessory dwelling units (ADUs) and townhouses, instead of large complexes. This trend results in fewer new dwellings, impacting both developers and tenants.

Stagnation in Construction

Construction has declined in L.A. County. During the first half of the year, 2,376 new apartment units were completed, marking a 9% drop from the previous year. The number of units under construction also fell by 15%, totaling 25,636. Developers are hesitant, with many deciding not to proceed with new projects.

Factors Discouraging Development

Several factors contribute to developers’ reluctance. High interest rates make financing projects challenging. Pandemic-era tenant protections affected revenues and continue to have repercussions. Measure ULA, imposing taxes on property sales above $5.4 million, adds further constraints.

Many developers adapt by limiting project size to avoid tax thresholds. Some reduce height and density, opting for smaller, easier-to-manage properties instead.

Increased Project Costs

Industry professionals observe rising ‘soft costs,’ such as permits and fees. These expenses now account for 20% to 25% of a project’s budget. Fees, like park charges for multifamily developers, also contribute to increased costs.

Incentives exist, but developers argue they’re insufficient to support larger projects.

Investor Sentiment

Despite the challenges, some investors explore opportunities as prices drop. Paul Darrow from Walker & Dunlop notes interest in appealing areas, while properties in less desirable neighborhoods lose value.

Schon remains cautiously optimistic about his recent property acquisition, though risks remain. Some properties remain underutilized due to economic constraints.