Housing Is the Biggest Challenge to L.A.’s Future Growth
Los Angeles has seen tremendous growth this cycle, but housing and affordability issues could derail more growth in the future.
“The Los Angeles region has taken multiple intentional actions to ensure its continued growth, which have resulted in the market weathering the Great Recession and emerging as a stable, growth-focused market,” Clare DeBriere, chair of ULI Los Angeles, tells GlobeSt.com. “Among those actions were to continue and to grow the significant investment in mass transit, to actively encourage our economy from a heavy aerospace focus to once much more evenly distributed to media, entertainment, technology, education and innovation based businesses, and we really capitalized on how we market and sell L.A.—from the active promotion of our sports teams, to our various neighborhoods, and active pursuit of high visibility tenants into our market.”
While this has all boded well for the Los Angeles market, housing is a substantial challenge for the market, and it could derail or stall future growth. “For all of the good that we have on our side of the ledger, there are some significant challenges that we face. We are great at bringing new businesses into our cities, but we cannot house their employees. We have a housing crisis of enormous proportions,” says DeBriere.
Exacerbating the housing crisis is the number of legal action taken against developers through CEQA, which has stalled current developments and contributed, at least partially, to the high cost of housing. “We also have a litigious environment related to CEQA that is making what should be a low risk investment in developing housing into a much riskier one,” explains DeBriere. “Investors have already recognized this risk and have priced it accordingly. Residential developments that are fully entitled and/or completed are priced at a premium, while those that have to go through an entitlement process of any kind are being penalized. And, given the very strong likelihood of a correction in the near term, investors are paying premiums for stabilized properties across all product types.”
While housing is a clear challenge for the market, real estate investors are finding ample investment opportunities. The ULI Emerging markets report lists Industrial, value-add, garden apartment and adaptive reuse retail as the top investment opportunities. L.A. is following these trends. “The adaptive reuse of an obsolete and vacant retail center could become housing, or an educational facility, or a clean-tech lab space—but it could take five years to go through an entitlement process to allow for those alternative uses,” says DeBriere. “Value add opportunities will become more prevalent as the market softens but, in L.A., will be subject to those same potential limitations.”
The biggest opportunity in Los Angeles, however, is finding new development opportunities. “We will find new ways to use our land to meet the needs of our consumers at every opportunity,” adds DeBriere. “Our biggest challenge is acquiring land and entitling it for those uses to which it is best suited, and to be able to do that in a reasonable time frame. Overall the best bets for L.A. are figuring out how to work in those communities which welcome new development, to develop on sites where the existing zoning will allow for new development, and when it’s the right deal, to sit back, take the time necessary and go through an entitlement process in preparation for our next up cycle.”