Los Angeles is undergoing a transformative shift in how people live, work, and play, driven by macroeconomic changes impacting commercial real estate. Capitalizing on these trends will shape a resilient future for our city, how our neighborhoods interact with people and its uses and ensuring a supply pipeline that is responsive in its evolution. In the wake of devastating wildÿres, it is more evident than ever, the need for a streamlined development process. HURDLES TO DEVELOPMENT One of the primary obstacles to development in Los Angeles is the high cost of construction. For example, the average construction cost for a multifamily development in Los Angeles is around $500 per square foot, significantly higher than the national average of $398 per square foot. This disparity is driven by the high cost of materials and labor, as well as regulatory burdens that add to the overall expense. The ongoing developments and rebuilding efforts throughout Los Angeles, along with the current macro environment, are likely to contribute to rising costs. Holding costs for development projects are slowing down transaction activity in the development sector. Projects with existing entitlements are more attractive because they have shorter development timelines. Rising interest rates and increased capital requirements for ÿnancing are adding to the overall costs, putting more pressure on the entire development period. The expected rent growth across all commercial real estate asset types is not keeping up with these rising costs, which is affecting acquisition terms and putting pressure on sellers. Sellers’ reluctance to lower prices and their ability to hold onto properties with historical ÿnancing deals are further constraining transaction °ow, reducing development pipelines, and limiting the supply of products that meet current market demand. Land restrictions and zoning laws present another significant hurdle. Los Angeles has some of the most stringent land use regulations in the country, which can limit the availability of land for new developments. These restrictions often lead to lengthy entitlement and permitting processes, adding time and cost to development projects.
THE IMPORTANCE OF SUPPORTING DEVELOPMENT
In the aftermath of the wildÿres that ravaged parts of Los Angeles, the city has a unique opportunity to rebuild better and stronger. Supporting development is essential not only for economic growth but also for community resilience. Simplifying the development process will help expedite the rebuilding of homes and businesses, providing much-needed stability for affected communities. Streamlined development processes have already shown promise in reducing bureaucratic delays and lowering costs. Los Angeles’ Executive Directive 1 (ED1) has enabled more affordable housing projects to move forward by cutting down on red tape and reducing city fees. The executive order issued by Gov. Gavin Newsom waiving the California Environmental Quality Act and California Coastal Act for those seeking to rebuild the estimated 12,000 structures that have burned, along with Mayor Karen Bass’ order requiring city staff to complete project reviews in 30 days and waiving some discretionary hearings, will serve as a test to show if development can be streamlined in a city as large as Los Angeles and how these projects will be perceived by investors and members of the community.
DEVELOPMENT OPPORTUNITIES BY ASSET TYPE
Development opportunities remain across commercial real estate types, including ofÿce, industrial, and multifamily, ensuring that the city remains vibrant and dynamic, meeting the needs of its diverse population.
- Office Development: The way people use office space is evolving, with a growing emphasis on flexible work environments. The demand for quality space with amenities remains strong, and the existing older products across Los Angeles is not necessarily meeting that need. To address excess supply, ofÿce conversions and redevelopment to other asset types like industrial and adaptive reuse projects offer an opportunity to address the city’s needs for new quality space while taking undesirable vacant space off the market.
- Industrial Development: The Greater Los Angeles region remains a critical hub for logistics and distribution, driven by its proximity to major ports and transportation networks. There are submarkets across the region that remain undersupplied from an industrial perspective, while others have seen an increase in sublease space, indicating a need for strategic planning to balance supply and demand.
- Multifamily Development: Multifamily development is crucial to the future of Los Angeles. The demand for housing remains high, driven by population growth and a shortage of affordable units. CBRE’s research indicates that the multifamily sector has shown stable fundamentals, with rental rates continuing to rise. Streamlining the development process for multifamily projects can help address the housing crisis and provide more affordable options for residents, especially as we think about rebuilding and creating new, resilient development after the wildÿres. When we think about development, we have to try to predict the future of what demand will be in the next several years. By helping remove barriers to development, we can move more quickly to address the needs of the market and foster the city’s growth and resilience. As Los Angeles continues to recover from the wildÿres, a streamlined approach to development will be key to rebuilding and thriving in the years to come.
Dean Hunt is the executive managing director, of Greater Los Angeles, for CBRE. Learn more at cbre.com.
