Q&A with Polaris Pacific's Miles Garber
The forces determining current LA condo market conditions are strong demand, limited supply and land scarcity. Under normal circumstances, the confluence of these is expected to drive prices up and trigger an influx of money from investors looking to capitalize on lucrative opportunities with new development. Polaris Pacific VP of Research Miles Garber identifies some factors inhibiting this process while providing a comprehensive and optimistic overview of the market.
Bisnow: The LA condo market is thriving, with the median sale price rising 7.3% year-over-year and resale inventory levels hovering at a favorable four months. What explains these conditions?
Miles: One driver that has certainly influenced the condominium market, as well as the rental market, has been the huge surge of investment on the Westside, dubbed Silicon Beach.
Major tech companies—from Google and Snapchat to Hulu and Facebook—have either claimed territory or expanded their office footprint in this area of LA. According to one estimate, tech firms account for a full quarter of Santa Monica’s workforce.
As wages and housing costs reach unsustainable levels in Silicon Valley, the comfortable climate of Silicon Beach, along with its proximity to schools like UCLA and USC, has proven the optimal setting for establishing a presence in an area filled with talented young technology workers.
The LA region’s image as a media and entertainment hub has also made it a prime expansion area for hybrid technology, entertainment, and media companies. Netflix, for instance, signed a 200k SF lease at Hudson Pacific Properties’ massive creative office, while development of Icon at Sunset Bronson Studios commenced last year.
The lease is the largest ever signed in the Hollywood submarket, and, at 14 stories, adds some height to Hollywood’s stunted skyline. Currently, over 2.3M SF of office space are under construction in Los Angeles, with Hollywood accounting for the largest share of the total at 460k SF. With such a large amount of office space under construction, LA is rapidly urbanizing and becoming denser. The expanding connectivity may be attributed to investment in infrastructure and a diversified economy in technology, entertainment, financial services. Los Angeles looks exceptionally well-positioned for steady economic growth.
Bisnow: The share of million-dollar homes in LA has doubled since 2012, and overall housing prices are well above pre-recession levels. Some take this as evidence of another housing bubble. Do you think growth like this is sustainable or an indication of speculation?
Miles: While the median home price has continued to increase, inventory conditions are a testament to the robustness of the market. The Los Angeles region currently has four months of resale condo inventory, well below the six-month benchmark figure that signifies a balanced market.
The relatively stagnant supply has led to pent-up demand prevailing in the market, resulting in a very favorable sales climate for new construction. It’s definitely a matter of perspective—the share of million-dollar homes in LA may not double again in the next four years, but most metrics point to steady growth.
New condo inventory has remained below historic trends and represents only a small fraction of the amount of new units delivered to the market. Downtown LA is a prime example—while there is a crane on every corner downtown, the vast majority of what is coming to market are rental communities.
From 2010 to 2015, approximately 15,000 apartments were delivered to the market. Only 1,850 condominiums were delivered in that span, representing just over 12% of all of the apartment inventory delivered during this time frame.
Bisnow: Besides general growth, what are the other major trends in the LA condo market right now?
Miles: One major trend that continues to reshape Los Angeles is a transition away from auto-centric development to one focused more on mass transit. This has naturally led to huge investment in housing near major transit stops along the current and future Metro stations. Martin Expo Town Center, 11460 West Gateway Blvd, Ivy Station and the Cumulus Project are just a few of the transit-oriented development (TOD) projects in the works. Many of these large-scale projects will also build office, retail, and/or greenspace, ensuring that the neighborhoods surrounding LA’s transit hubs will be dynamic, mixed-use and accessible.
Bisnow: What are the greatest challenges you see facing the LA condo market, and how will you address them? What would you recommend developers or the city government do to provide solutions?
Miles: The major issue facing the LA condo market continues to be a lack of inventory. Without brand-new condominium comps to use as benchmarks, it becomes much harder for a developer to convince equity investors and lenders to supply their projects with capital.
With a city as diverse as Los Angeles, one has to take a look at the submarkets to get a clearer picture of what is going on. The Westside, for instance, will soon see an influx of super-luxury, five-star hotel-equivalent condo buildings.
While there is definitely residual demand for this type of product, we’re not seeing a lot of four-star equivalent products coming to the market, leaving a void—and an opportunity—in the market for this type of product.
The city should do everything it can to create an environment that supports development of more diverse project types. One way it can encourage new housing for “the missing middle” is by expanding its density bonus program, which would enable developers to create more housing per acre in exchange for a higher percentage of on-site affordable housing.
Additionally, the planning codes should be reassessed to permit smaller average housing sizes. These sizes will create lower nominal sales prices for homebuyers, while still retaining high PSF figures to keep new condominium development feasible.
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