LA and Other West Coast Markets are Experiencing a slow down in new construction development.
Despite a worsening housing crisis, many major West Coast cities have seen a decline in new 2023 construction projects. Although demand for housing remains consistent, developers are pumping the brakes due to high interest rates and the inability to secure debt financing. As demand for housing continues to grow and supply begins to stagnate, upward pressure on rents and property values could lead to additional upside for property owners come 2025.
- Record inflation in 2022 saw construction costs increase considerably, cutting heavily into the margins of developers.
- Debt costs have skyrocketed in the past months, with many construction loans containing rates above 10%.
- Further turbulence among regional banks has exacerbated the issue and with many developers either unable to secure loans or forced to finance with very low leverage.
- The Mansion Tax in Los Angeles has made the merchant development of apartments nearly unfeasible when 5.5% of future sale proceeds is slapped on to all deals exceeding a $10M+ exit price.
Effects and Implications:
- While current construction projects are still hitting the market, you may see the current dip in new construction having its market impacts in late 2024 to 2025, further exacerbating the supply and demand imbalance that exists in LA.
- Lack of supply and an abundance of demand likely will result in increases in both rents and property values, bettering the position of current property owners.
- As we sit in a current market marked by rising cost of debt and declining values, it is important to look past the present to see if any future market trends might lead to increased returns. With projections of easing interest rates through 2024 and 2025, combined with the possibility that the lack of new construction may lead to an even tighter housing market, holding now with intent to sell in 2025 may not seem like such a bad option.