Due to a lack of available loans and vanishing profit margins, developers in Los Angeles have ceased their activities.

Several months back, Schon Tepler, a multifamily developer based in Los Angeles, secured all the necessary city entitlements for its upcoming project—a 30-unit apartment building in Koreatown, a popular area for new construction in Central L.A. However, the firm has decided against proceeding with the construction of the entitled project.

Artem Tepler, one of Schon Tepler’s founding partners, explained that, given the current economic climate and the city’s recent implementation of a steep transfer tax, the project costs would essentially match the building’s market value. Instead of pursuing the original plans, the firm is contemplating a revamp, including removing a parking garage and converting one-bedroom units to two-bedroom units eligible for affordable housing. This shift signals a potential slowdown in the firm’s Los Angeles projects, as Tepler and his partner, Paul Schon, are temporarily halting their search for new projects in the city.

In the summer of 2023, Los Angeles is witnessing a common refrain: ongoing projects are wrapping up, but the overall development climate in the city has become notably grim. Many firms are losing interest in building in Los Angeles, and the multifamily pipeline is rapidly dwindling. The challenging development environment extends beyond L.A., affecting multifamily developers nationwide due to economic uncertainty, high interest rates, cautious lending, and subdued demand for new inventory in cities like Denver and Austin.

L.A. faces a unique combination of challenges, including inflation, soaring labor and land prices, a crisis affecting regional banks, and a slow and complex approvals process compounded by a new transfer tax—Measure ULA—on property deals over $5 million. This tax, aimed at addressing homelessness, has become a major deterrent for multifamily developers, adding a substantial surcharge to significant land deals.

While a legal hearing on Measure ULA is scheduled for October, its initial months have yielded disappointing results, causing developers to abandon new projects in the city. Even those still interested in building in L.A. are encountering uninterested institutional lenders, deterred not only by the transfer tax and tight margins but also by the city’s recent left-leaning initiatives, including robust tenant and rent protections during the pandemic.

The cumulative effect is evident in the development pipeline, experiencing fewer property deals, reduced project applications, and a decline in actual apartment constructions. Over the past decade, L.A. County averaged 10,000 to 11,000 unit starts annually, but this year, up to August, only about 3,000 units were started, with a further decline expected for the rest of the year.

Despite these challenges, some developers, particularly those dealing with smaller builds below Measure ULA’s threshold, are adapting their strategies to pursue new projects. However, the general sentiment among developers is that L.A.’s development downturn is likely to persist in the near term. Large firms like Alliant Strategic Development are exploring creative financing options, such as a state program offering tax-exempt bonds for affordable multifamily developments.

While experts acknowledge that L.A.’s downturn won’t be permanent, the current frigid forecast prompts many developers to seek opportunities elsewhere. Despite the region’s enduring appeal and strong economy, the challenges presented by local politics and the current development climate are pushing developers to explore projects in other cities, like the firm Schon Tepler’s 400-unit project currently in the permitting process in Austin.

Written by Trevor Bach | Source: The Real Deal | September 5, 2023