California, the land of sun, surf, and opportunity, has long been a magnet for real estate developers. Yet, the Golden State is also notorious for its complex web of regulations, sky-high land prices, and ever-changing market dynamics. For developers and investors, the California multifamily market presents a paradox: a landscape brimming with potential yet fraught with challenges that require careful navigation.
The Lay of the Land: California’s Multifamily Housing Crisis
California’s housing crisis is no secret. With a population of nearly 40 million, the state has set an ambitious goal of building 2.5 million housing units by 2030. But this goal appears increasingly elusive. Over the past decade, California has averaged fewer than 80,000 new homes annually, far below the nearly 500,000 units needed each year to meet its targets. The state’s struggles continued into 2024, with multifamily housing permits plunging by 22% compared to the previous year, marking a 10-year low.
So, why are developers hesitant to build in California despite the apparent demand? The answer lies in a combination of factors: regulatory hurdles, protracted permitting processes, high land costs, and the rising expense of construction materials. For some developers, like Atlanta-based Wood Partners, these obstacles have proven too daunting. The firm, one of the nation’s largest apartment developers, recently announced it would cease pursuing projects in California, a decision that sent shockwaves through the industry.
Why Some Developers Remain Optimistic
Yet, even as some developers retreat, others remain steadfast in their commitment to California. Leading the charge is Greystar, the nation’s largest multifamily owner, developer, and manager. For Greystar, the math is simple: the demand for housing in California far outstrips the supply, creating a significant gap that the firm aims to fill.
“We are big believers in the California market and are committed to bettering the communities we operate in,” says Zach Schamp, Greystar’s Director of Development. Greystar’s portfolio in the state is vast and diverse, spanning market-rate multifamily housing, student housing, senior living, and build-for-rent communities.
Similarly, Alliance Residential Co., based in Scottsdale, Arizona, remains bullish on California despite the challenges. “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,” says Jay Hiemenz, Alliance’s President and COO.
Adapting to Market Shifts
The COVID-19 pandemic reshaped California’s housing market in profound ways. Remote work trends accelerated demand in suburban and less densely populated areas, prompting developers like Greystar to adapt their strategies. While the firm maintains a strong presence in major cities like Los Angeles, San Francisco, and San Diego, it is also exploring opportunities in regions with robust economic activity and population growth, such as the Inland Empire.
In August, Greystar opened The Row at Red Hill, a 1,100-unit mixed-use development in Santa Ana. This $650 million project is emblematic of Greystar’s approach: focusing on areas with strong economic fundamentals while remaining agile enough to pivot as market conditions change.
Navigating the Regulatory Maze
California’s regulatory environment is often cited as one of the biggest hurdles for developers. Complex permitting processes, stringent environmental regulations, and local political dynamics can all conspire to slow down or even derail projects. However, there are signs that the state is working to address these issues.
Recent legislative efforts, such as Senate Bill 35, aim to streamline the approval process for developments that include affordable housing components. Additionally, many cities in California are revising zoning codes to encourage sustainable development. While these changes are promising, they also come with new requirements that developers must carefully consider.
“This is encouraging and helps facilitate our projects,” Schamp acknowledges. “However, some new regulations include provisions that require a thoughtful approach, such as increased environmental requirements and the complex permitting processes.”
The Road Ahead: A Market of Opportunities
Despite the challenges, developers like Greystar and Alliance Residential remain committed to California for one simple reason: opportunity. California’s housing market, particularly in the more affordable segment, remains undersupplied. This supply-demand imbalance creates a favorable environment for developers who can navigate the regulatory maze and adapt to shifting market dynamics.
Alliance Residential, for example, has been expanding its presence in California over the past decade, focusing on workforce housing and senior living to meet the state’s diverse needs. “We see the need for more affordable products and have brought our Prose brand into the market,” Hiemenz notes.
Moreover, California’s status as a supply-protected market, with long entitlement timeframes, means that even with some outmigration, the state remains an attractive proposition for developers. “Unless there’s a dramatic shift in employment or housing costs, we would intend to continue looking at opportunities in California across the spectrum — luxury, affordable, and seniors,” Hiemenz adds.
A Complex but Rewarding Market
For investors, understanding the California multifamily market requires a nuanced approach. The state’s challenges are significant, but so are its opportunities. Developers who can navigate the regulatory landscape, adapt to changing market conditions, and focus on areas with strong economic fundamentals will find that California’s multifamily market still offers substantial rewards. In a state where demand consistently outpaces supply, the potential for growth remains high, making California a market worth watching — and investing in — for the foreseeable future.
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