L.A. Construction Nears End of Cycle
Construction activity in Los Angeles has remained strong, but with more and more product delivered, supply is beginning to outstrip demand.
“Construction activity has increased significantly in L.A. in most sectors including industrial, healthcare, infrastructure, multifamily and commercial office,” Carlos Serra, managing director at JLL, tells GlobeSt.com. “With that said, a number of these markets are close to the end of their cycle where supply is now outstripping demand, specifically in multifamily.”
Job and industry growth, particularly in technology and media industries, has driven the surge in new construction. The most successful examples are Hollywood and Downtown Los Angeles, where the construction pipeline has included office, multifamily, hotels and retail. “Activity has increased in recent years with the emergence of local tech companies some of which are based and founded in L.A. and others in Silicon Valley,” says Serra. “The emergence of these new businesses in the last three to five years has created demand in multiple sectors, including multifamily, retail, and hospitality. Other drivers behind construction activity were the influx of Asian developers that were aggressively entering the L.A. market for the last few years however this trend is reversed and most of these original Chinese developers have exited the local market due to restrictions on government funding and financing leaving China and the potential over supply in certain sectors.”
More impressively, new construction has flourished in spite of significant challenges, including rising land, labor and materials costs. “The rising construction costs have greatly affected the ROI for developers to the extent that the increase in costs have greatly reduced the residual land value of a development site once a developer accounts for all project related costs and their own profit and discounts this from the prospective revenue,” says Serra. “The lower residual value of the land has in turn made it much harder for developers to acquire entitled land as the land vendors are still pricing their land at higher levels. Consequently, some developers in certain sub-markets, like the Arts District, are being more patient in terms of redeveloping the land at this time.”
Now, construction activity could be slowing in response to these costs along with rising interest rates and new construction deliveries. “There are high levels of construction activity in most asset classes though residential have slowed down significantly due to fall in demand,” says Serra. “With the potential of a recession, in the next 12-36 months we expect to see a slow-down in other sectors such as hospitality, retail, but education and healthcare likely to have significant investment even in a slow-down.”