Despite a difficult financing market and economic uncertainty, Century City-based Cityview is not shying away from development. The multifamily developer, which oversees a $3 billion portfolio, has four projects in the works in Los Angeles: the 243-unit Belle on Bev in Filipinotown, the 123-unit Liv on Pico in Mid-City, the 296-unit Jasper near USC and the 265-unit South Bay X in Gardena.
Cityview Chief Executive Sean Burton called 2022 “the best year in the history of the firm,” but added that he expected 2023 to hold a few challenges.
This year, the company is looking to do six to eight projects in the Western U.S. — a combination of ground-up projects and acquisitions — and in 2024 increase that number to 10 to 12. Notably, all of the company’s projects will be comprised of 150 to 200 units.
“It takes the same amount of work to do a 150-unit deal as it does to do a 50-unit deal,” Burton said.
But rising interest rates and new regulations in Los Angeles are both going to impact development nationwide and in the city, Burton said.
Interest rates
Perhaps the biggest area of concern for many developers now is that rising interest rates is leading to a difficult lending environment.
“Development is adjusting, the lending for development has been challenging,” said Kitty Wallace, a senior executive vice president at Colliers. “The peak of our market was early this past year. Rents were increasing … rents were growing and our fundamentals were very strong and our debt market was pretty good. Then our debt market got softer and softer and softer.”
“The market has moved substantially,” she added. “We had a drop from March to November and then from November to March.”
Burton said it took “more time and it’s harder to get financing now” leading to Cityview “tightening our underwriting for new projects.”
He said the company had also “dampened our rent growth expectations” over concerns of a potential recession and was willing to pay less for land than it may have before in order to still make a profit. Still, he said Cityview is going to continue to develop despite a difficult financing market.
Cityview has made sure to have discretionary capital available to be ready for any opportunities that do arise.
“When things turn, they turn very quickly,” Burton said, adding that this could mean deals for the firm.
LA’s issues
Despite Cityview being based in Los Angeles, Burton said the city “continues to be a smaller part of our national footprint because of regulatory challenges.”
“Some … don’t want to build anymore in L.A. because of what’s transpired,” Wallace added. “These legislative challenges have caused some of the people that are good at building to leave.”
Burton is still interested in L.A. County, but said there were some difficulties in the city.
One is Measure ULA, which goes into effect in April and increases the transfer tax for real estate sales of more than $5 million in L.A.
“ULA was a massive blow to the industry. It’s a huge disincentive to invest capital in L.A. It’s one of the largest (transfer taxes) in the country,” he said.
Wallace said people are “getting nervous” about ULA, and that has affected the way investors underwrite projects in L.A.
“We will see some trades for the month of March, we have seen trades all this quarter with institutional sellers selling at lower prices to avoid that tax,” she added.
Peter Yorck, a managing director at Jones Lang LaSalle Inc., agreed that Measure ULA was creating issues in the marketplace.
“When we look at development throughout L.A. County, we’re seeing a bifurcation of interest. In the city of Los Angeles, development and equity raises have become a lot more challenging, and that’s almost entirely because of Measure ULA … it will have a material impact in terms of net proceeds,” he said.
Yorck added that areas in L.A. County but not in the city of L.A., such as Culver City and Long Beach, were still seeing a lot of interest.
Late last year, he said, he even saw a number of owners looking to sell properties before Measure ULA went into effect.
Laurie Lustig-Bower, an executive vice president at CBRE Group Inc., said not only sales, but also development, was impacted by Measure ULA.
“Interest for multifamily development has waned a bit. We had rising interest rates of course negatively impact it, but what really had a big hit was the ULA Mansion Tax,” she said. “A lot of people think the Mansion Tax affects the current sale … but what we’re finding with development specifically is this Mansion Tax is having a huge impact on what they can build.”
She added that the developers have to factor in the tax when determining how much can be spent on land and developments to still turn a profit.
Lustig-Bower estimated that land is selling at about a 20% discount as a result.
There are a number of lawsuits looking to block the measure.
Things such as eviction moratoriums and rent control, Burton said, also hurt the city. Burton added that Citiview is not buying rent-controlled buildings and has fewer properties in the city of L.A. now than before.
“L.A. continues to be a smaller part of our national footprint because of regulatory challenges,” Burton said, adding that the city “has a tough reputation as a place to do business.”
He said that Cityview was still interested in L.A. County, but not as much in the city of L.A. where ULA and other regulations are in effect. Areas like Culver City and the area around Space X in Hawthorne are of particular interest, he said.
And Burton said there has been some good legislation lately, like SB330, a state law signed in 2019 which aims to speed up development by limiting the number of hearings for new developments and reducing the timeline for project approvals.
And L.A.’s housing dearth still makes it a desirable market to build in.
“We still have an outrageous shortage of housing units in Southern California and very high barriers to entry,” Wallace said.
New opportunities
Going forward, Cityview is looking at doing work in Los Angeles County, but also in areas outside of L.A., such as Orange County, San Diego, and the Bay Area, as well as outside of California.
Burton said Phoenix, Denver, Texas and Seattle were among areas of interest to the company.
Burton also expects to see some assets sell at a discount, making the company more interested in value-add propositions.
This summer, Burton added, he expects to see some assets that carry a lot of debt and have low interest rates expiring come up for sale.
“In 2023 there will be some strong value-add opportunities,” he said. “There’s a lot of capital out there waiting to pounce.”
Yorck said owners listing their properties now in response to Measure ULA and other factors could mean opportunity for others, but he is still seeing a lot of interest.
“There’s no shortage of bids, there’s no shortage of equity that wants to make deals on the market, but there’s still a bid-ask spread between what buyers want to buy properties for and what sellers are looking to sell for,” he said, adding that “the bid has shrunk.”
And CBRE’s Lustig-Bower said that despite some difficulties in L.A., the city still “has excellent fundamentals in terms of supply and demand. Our occupancy rate in apartments in L.A. City is very high, in most cases over 95% occupied, and we have a really tight rental market.”
Still, she said she is seeing only about 50% of the offer activity she was a year ago.
