Following a tempered Winter outlook, Summer 2024 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey panelists see multifamily housing poised for growth over the next few years, as slowed development influences demand and vacancy rates. Increased home prices and increased rental rates in California, as well as new laws easing some of the regulatory burden for developers, are reflected in the panelists’ optimism. While fewer panelists are planning new multifamily development than this time last year, the number is higher than compared to Winter 2024. Kitty Wallace, Senior Executive Vice President, Colliers International and Tim Hutter, Partner, Allen Matkins, discuss what the next three years for this sector of the California commercial real estate market.

The Challenge of New Construction

According to the survey, there is a lot of new development in multifamily but Wallace agrees to disagree. “There's definitely some new multifamily planning three to four years down the road, but with the cost of construction, land and the unknowns, the thought of building new construction today is challenging.” From Hutter, “We're seeing fewer projects actually break ground, so there's less competition for the contractors and the subcontractors to be involved. You would hope that you'll start to see some of their pricing adjust, and that will give a little bit more room for developers.”

The California Density Bonus Law

“At the state level, one of the big benefits that I think we're going to see from AB 1287, a bill that passed in 2023 and went into effect in January, is an opportunity to layer moderate income housing on top of a project that is already earning a bonus for providing very low or low-income housing, and thereby earn even more market-rate units,” says Hutter. “That gives me some hope for the future, that this middle-income targeted housing can be something that we actually produce in the next three, four, five years because developers are incentivized to do it.”

For Wallace, one of the best things to happen in Los Angeles recently is ED 1 development. If you buy something in the City of Los Angeles, you can fast track the development to get entitlements within a year. With unlimited density, the cost to build this type of product is substantially less.

Hutter continues, “State density bonus law continues to be refined every year and becomes a more powerful tool. There were some great adjustments that just came into effect in 2024 that we're putting into planning now for new projects going forward.” 

Developing Creative Solutions

“There's an opportunity right now that suggests that keeping or buying existing rather than building is an easier path,” says Wallace. “But at least 25% of the property that comes across my desk, we're able to rejigger and adjust and do something else that might work even better.” The capital is currently coming from mission- based groups and funds and according to Wallace, “These people are saying I can't just rent to the people who can pay $5,000 per month, I need to rent to a wider variety of income levels. That money is buying some of our current apartment buildings, and that’s an example of the creative solutions that I we're seeing.”

Where to Invest?

“Everybody wants Class-A multifamily apartments or value-add buildings,” says Wallace. “We're doing alternative investments and we're seeing alternative investors come in, and student housing, senior housing, workforce housing, and affordable housing are all attractive to these investors.”

Where to Build?

Orange County, in Southern California, with great school districts, is a prime spot to build. There has been some development in the Inland Empire, which leads Southern California in job growth. Northern California is also really changing right now. “We're on a path of progress there,” says Wallace. “They've made the turn and started to recover.”

Following the Transit Lines

Hutter sees a continued trend of new development being pushed to the coastal areas, to the downtowns, and to major cities because of the efforts now being made to embrace density and transit. He says, “There has been a huge explosion of new development along the transit lines in Los Angeles. You're going to see the same thing in the City of San Diego.” In those areas where transit is a part of the state's effort to combat climate change, there is pressure and an opportunity to be building in those areas. “You’re also going to see a continued flight of capital to those areas where cities have adopted friendlier policies, where they have friendlier staff, where there is a known quantity and reliability in the decision-making process.”