Los Angeles County Housing Stock

Los Angeles County faces a critical housing dilemma: while experiencing a loss of 2% to 3% of its housing stock annually, it only manages to regain 1% each year. The root causes of this disparity lie in a complex interplay of legislative frameworks, market dynamics, and economic factors. Despite these efforts, challenges persist, including financing constraints exacerbated by increased interest rates and escalating construction costs driven by material and labor inflation. This article dives into the multifaceted landscape of Los Angeles County’s housing market, exploring the implications of regulatory reforms, market trends, and cost dynamics while charting a path forward amid these challenges.

Los Angeles County loses between 2% to 3% of the housing stock and only gets back 1% every year. Why? 

CEQA (California Environmental Quality Act)

The California Environmental Quality Act (CEQA) requires government agencies to consider the environmental consequences of their actions before approving plans and policies or committing to a course of action on a project.

• It can take several weeks to a year to be either approved or not approved. 

SB 10

SB 10 aims to expedite housing development by exempting specific projects from environmental review under certain conditions.

This law allows the construction of up to 10 dwelling units on any parcel within designated transit-rich areas or urban infill sites. These areas are typically characterized by high-quality public transportation options and existing infrastructure, making them ideal locations for denser housing developments.

AB 1449

This bill will facilitate affordable housing development by exempting from CEQA certain 100% affordable housing projects throughout California.

AB 1633

This bill allows the developer of a qualified infill project to challenge a local government’s decision to deny the use of an exemption under the California Environmental Quality Act (“CEQA”) or to require further environmental analysis rather than adopt or certify the CEQA document. Although limited to these specific decisions under CEQA and to projects meeting detailed criteria, this is the first legislation to expressly authorize a developer to challenge the way a local government processes a CEQA determination.

AB 1307

AB 1307 would reverse the “people as pollution” precedent a recent Appellate Court decision created. Failing to reverse this precedent will result in a massive increase in Environmental Impact Reports (EIRs) for residential projects and will provide NIMBYs with a powerful new tool to block the production of affordable housing. AB 1307 would reverse this precedent by declaring that noise generated by the unamplified voices of residents in a residential project cannot be considered a significant effect on the environment pursuant to the California Environmental Quality Act (CEQA).

Capital Markets

• The Hilgard report points to impacts on development in Los Angeles, from rising interest rates to a cooling job market to labor disputes that have resulted in a less desirable environment for developers.
• The city handed out 11,437 homebuilding permits from January through September, a 5.3 percent decline compared to the same period last year, Urbanize Los Angeles reported, citing a report by Hilgard Analytics. “This represents a fall of 5.3%, or 641 units in absolute terms through the same period last year.” (2023)
• The city issued construction permits for 640 fewer homes during the first three quarters.
• In order to keep pace with the 15,621 housing permits Los Angeles gave last year, the city would have to dispense 4,184 homebuilding permits between now and New Year’s.

Cost to Build

Cost to Nonresidential buildings inflation 10-year average (2011-2020) is 3.7%. In 2020, it dropped to 2.5%, but for the six years 2014 to 2019, it averaged 4.4%. It jumped to 8% in 2021, the highest since 2006-2007. In 2022, it hit 12%, the highest since 1980-81.

• Residential 8-year average inflation for 2013-2020 is 5.0%. In 2020 it was 4.5%. In 2021, it jumped to 14%, and then in 2022 reached 15.7% – the highest on record.
• The 30-year average inflation rate (excluding 2021 and 2022) for residential and nonresidential buildings is 3.7%. Excluding deflation in the recession years 2008-2010, then for nonresidential buildings, it is 4.2%, and for residential, it’s 4.6%.
• CBRE’s new Construction Cost Index forecasts a 14.1% year-over-year increase in construction costs by year-end 2022 as labor and material costs continue to rise. Escalation should stabilize to the 2%-4% range in 2023 and 2024, on par with historical averages.
• The price of construction materials rose 1.3% in January 2023 alone, according to new data by Associated Builders and Contractors. In addition to being 1.3% higher than the December 2022 figures, the prices are also 4.9% higher than this time last year, the smallest annual increase since January 2021.
• Residential current rate of spending is 1.5% above the 2023 average and is forecast to average an increase of 0.5%/mo for 2024.

According to ABC’s analysis, derived from data from the U.S. Bureau of Labor Statistics, the annual increase has been driven by the cost of adhesives and sealants (up 13.4% annually), brick and structural clay tiles (up 12.9% annually), concrete products (up 14.8% annually) and gypsum products (up 10.7% annually).

• Commodities that have seen the largest price decrease over the past 12 months include iron and steel (down 23% annually), lumber and wood products (down 12.3% annually), and softwood lumber (down 44.1% annually).
• All construction types and materials remain significantly more expensive than they were in February 2020, with the overall cost of construction 37.7% higher now than at the start of the pandemic.
• Some of the most notable material price increases compared to February 2020 include brick and clay tiles (up 25.5%), concrete products (up 27.9%), iron and steel (up 55.9%), and lumber and wood products (up 28.7%). The single largest construction commodity increase is natural gas (up 219.4%), while the smallest increase is softwood lumber (up 17%).

Sacha Boroumand Agent Analysis

The Environmental Quality Act made it difficult for units to be built due to noise pollution, but new bills such as SB 10, AB 1449, AB 1633, and AB 1307 will help streamline approval for units to be built. CEQA has made it increasingly difficult for developers to build units and properties, and hopefully, these new Bills will make the process easier and bring forth faster and more housing units into the market.

Debt has played a significant factor as interest rates have soared in the last few years, lowering transactions, refinancing, and new builds. Capital markets have struggled to finance developers who are not keen to pay such high-interest rates, especially if they are building large projects. These past few months and in the near future, interest rates will decrease, hopefully boosting transactions, refinancing, and new developments.

Los Angeles Real Estate Market

The real estate market in Los Angeles County has been impacted by rising interest rates, a cooling job market, and labor disputes, which have created challenges for developers seeking financing. The decline in homebuilding permits in 2023, as Hilgard Analytics reported, underscores these factors’ impact on development activity. However, forecasts suggest a potential stabilization of escalation rates in construction costs, which could alleviate some of the financial strain on developers in the coming years.

The cost to build has surged in recent years, driven by construction materials and labor inflation. The sharp increase in material prices, particularly for commodities like wood, has contributed to significant cost escalation for development projects. While some materials have seen price decreases compared to peak pandemic levels, overall construction costs remain substantially higher than pre-pandemic levels. This sustained cost pressure poses challenges for developers in maintaining project feasibility and profitability. As a developer yourself, I am sure you have felt this increase in payments. According to a contractor that I know, wood went from $3 a plank to $12 (2022). This exponential increase has made it unappealing to work on a project that would have been easy to build. I do not think the prices will go down, especially by a large margin. I think paying high prices for materials and labor will become a new standard.

Looking Ahead | Los Angeles County

Despite the challenges posed by regulatory hurdles, financing constraints, and cost escalation, there are reasons for cautious optimism in the Los Angeles County real estate market. Legislative reforms aimed at streamlining approvals and promoting affordable housing development offer potential pathways to address housing supply shortages. Moreover, forecasts of stabilization in construction cost escalation rates suggest a more sustainable operating environment for developers in the medium term. However, navigating these complexities will require proactive strategies and adaptation to evolving market dynamics.