Earlier this summer, Atlanta-based Wood Partners, the fourth-largest apartment developer in the U.S., declared that it would stop pursuing projects in California as part of a strategic shift.
That was unwelcome news for the state of California, which has set an ambitious goal of building 2.5 million units of new housing by the end of 2030, requiring nearly 500,000 units per year. Yet, over the past 10 years, fewer than 80,000 new homes on average have been built, according to the California Department of Housing and Community Development.
Things aren’t looking much better in 2024 either, with data from the U.S. Census Bureau compiled by the St. Louis Fed showing permits for approved multifamily housing dropping 22% to 8,972 units compared to 2023 figures, which represented a 10-year low.
Some of the challenges keeping developers on the sidelines in the state include regulation hurdles, a complex permitting processes, insurance issues, high land prices and the rising cost of construction materials.
Still, many of the top U.S. developers continue to see big promise in the Golden State. For instance, Zach Schamp, director of development for Charleston, South Carolina-based Greystar, told Multifamily Dive that the demand for housing in California far exceeds the current supply, creating a significant gap that the firm is aiming to address.
“We are big believers in the California market and are committed to bettering the communities we operate in,” Schamp said.
Greystar, the No. 1 multifamily owner, developer and manager in the country, has a significant presence in California, reflecting the state’s dynamic and diverse real estate market, he added.
“Over the years, we have expanded our portfolio to include a variety of asset classes, such as market-rate conventional multifamily, student housing, senior housing and build-for-rent communities,” he said.
Scottsdale, Arizona-based developer Alliance Residential Co. is also fairly bullish about new projects in the state.
“California overall is undersupplied for housing, but we see this gap as an opportunity assuming we can navigate the challenges of getting through the regulatory hurdles,” Jay Hiemenz, president and COO of the company, told Multifamily Dive. “Leadership in each community really dictates a developer’s success in that community. Although the state appears to be trying to address the housing shortage statewide, the reality of local politics still dictates land use in general, which impacts where we are able to build.”
Regional outlook
Recent economic shifts, including the pandemic and changes in migration patterns, have significantly influenced Greystar’s business strategy and outlook for multifamily development in California.
“The pandemic accelerated trends such as remote work, leading to increased demand in suburban and less densely populated areas,” Schamp said. “As a result, we have adapted our strategy to explore opportunities beyond traditional urban centers while still maintaining a strong presence in major cities.”
For instance, in August, Greystar opened the 1,100-unit The Row at Red Hill in Santa Ana, part of a $650 million mixed-use project. Its current focus is on areas in California with robust economic activity, strong population growth and favorable demographic trends.
“The Bay Area, Los Angeles, San Diego and the Inland Empire are of particular interest due to their economic dynamism and demand for diverse housing options,” Schamp said. “However, we continuously evaluate and adapt to market conditions, ensuring that we pursue opportunities that align with the unique needs of each market and location.”
California is working to address challenges facing developers through regulatory changes that provide more flexibility on what can be built. For instance, the state has enacted SB 35, which permits qualifying developments with certain minimum affordable housing guarantees to move more quickly through the local government review process. Additionally many of California’s cities are revising zoning codes to allow for developments with strong sustainability components.
“This is encouraging and helps facilitate our projects,” Schamp said. “However, some new regulations include provisions that require a thoughtful approach, such as increased environmental requirements and the complex permitting processes.”
Despite these challenges, Greystar remains committed to developing in California.
“We believe in the state's long-term potential and are dedicated to working within the regulatory framework to create high-quality housing solutions for its residents,” Schamp said.
Supportive of growth
Alliance Residential has increased its presence in California over the last decade and found opportunities to add workforce housing in the state.
“We see the need for more affordable product and have brought our Prose brand into the market,” Hiemenz said. “Additionally, we’ve expanded senior housing into the market in recognition of the aging population and unmet demand.”
Alliance understands excessive market demand with no community support isn’t a winning combination, so it looks for communities that are supportive of growth first, and then it can evaluate the demand profile and the highest and best use for the site that will receive community support, he said.
“California has always been a supply-protected market, with long entitlement timeframes; therefore, even accounting for some outmigration,” Hiemenz said. “It’s still undersupplied, particularly in the more affordable segment. Unless there’s a dramatic shift in employment or housing cost, we would intend to continue looking at opportunities in California across the spectrum — luxury, affordable and seniors.”
