Navigating the Challenges and Opportunities of Multifamily Housing Development

Hello and welcome to the Creative Viz Podcast, where we talk about topics in architecture, development, and visual design. Today, I'm pleased to have Alex Kolodziejczyk. He is a Vice President of Development with CIM Group in Los Angeles. Welcome, Alex. Great to see you. Morning, Scott. Thanks for having me. Absolutely. Love to talk about housing development, particularly multifamily housing in your neck of the woods, Southern California. One of the topics that comes up so much these days is affordability. I'd love to hear kind of your take on where the market is right now and what can be done to try to tackle the affordability problem that's so acute right now.

I've been developing commercial real estate here in Los Angeles with CIM for the past seven or eight years. And things are definitely getting a lot more challenging. The way the interest rates are, the way the cost escalations coming out of COVID are still very prevalent. Adjustments and staffing, both on the private side and the municipal side certainly makes things difficult and, in some ways easier but it's definitely getting overall harder and a lot of different ways and from an affordability side we were all hoping that the rental growth of the past few years would keep on, marching along but as we kind of seen in the past 12 months rental rates have kind of topped out in most major markets and coastal markets, especially LA. It can't really get much higher for a standard market rate product and with the interest rates purchasing sale for condos is not exactly a viable option at the moment. And so, we're kind of in a standstill at the moment.

You mentioned some things might be getting easier. Is that something you can talk about? Well, I can say from a municipal perspective, the city of Los Angeles has really tried to overhaul their plan check process. And they've gone electronic on many things which for basic level applications and reviews makes things a lot easier. Just having to go through an online portal and upload plans and not having to wait in line and sit at a counter and kind of pull a ticket and try to get a plant checkers attention certainly helps in that regard. But there's some challenges associated with that electronic system. Sure, I can imagine. Pros and cons, always, right? Yeah. I'm thinking something else that might be changing for the better. The city of LA in particular is looking at increasing upzoning sites near transit. Is that something that you're seeing and could potentially be helpful? Yeah. I mean, the state's density bonus program has always been alive and well. But now with TOC, there's extra incentive for development around high transit areas whether that be a bus stop, future train, stop major nodes throughout the city. Each program has its own little nuances but generally speaking the TOC applicable areas are definitely a good place to look at for the extra incentive. Absolutely, so do you find then that it's competitive for these somewhat limited sites that are near transit? Yeah, it definitely adds a lot of value to a site for a ripe redevelopment or new construction project you have a lot of opportunity to think about. In terms of density, parking reductions everything from setback adjustments. And there's a pretty long list of incentives. And I think the local communities through community plans and overlays have been starting to adopt their own sort of interpretations. Of the TOC areas for better or worse. I think it's really competitive. And much as zoning likes to push things forward, the state reducing the parking requirements is always an interesting benefit and gives a developer a lot of flexibility. But in some ways, we're still asking ourselves the question are we really ready to put up a new multifamily building with minimal, if not any parking?

Right, are tenants ready for that? And then are you seeing any shifts at the community level? Nimbyism has been such a problem throughout the country, especially in California. Are you seeing any shifts there? People may be more open to new development than they might have been in the past. I can say that historically, L. A has been very traffic focused. And so, the traffic impacts of anything you planning to do on a site is highly scrutinized. So, interpreting the 2035 mobility plan in Los Angeles and, having that constant struggle with pure engineering in terms of expanding roads versus widening sidewalks is always kind of a juxtaposition there with the city's rules. But from a community perspective, I think there still is some apprehension about putting commercial traffic on local roads, depending on where these nodes are throughout the city. But generally speaking, there's a lot of food deserts out there still, especially throughout South LA. And so, you have to improve the infrastructure and you have to bring in that traffic to get a major retailer or some real, commercial focus to those areas. There's a tension between getting the foot traffic, but yet the traffic on the roads for the neighbors. Are you having success? Are there specific things that the neighborhoods communities are looking for in new development? I can say that there is definitely an apprehension towards any above ground parking, city planning, through community involvement has really put a restriction on above grade parking. They don't want to see it. They don't want to feel it. They really understand that it's, not the most visually pleasing and it's, left to the open market. We'll probably not make it the most beautiful parking structure out there. So, there's a big push and kind of incentive to put parking underground which has its own costs and implications. I think that's probably the most notable, storefront percentages certainly scrutinized in a lot of community plans. Of course, setbacks. At any time, you're building commercial next to residential, there's always some transitional height impacts relative to maybe some residential across the street. And how that impacts height restrictions. It's just always interesting. These things that are nice to have that we want, but end up adding costs to the projects, moving parking below ground makes the units more expensive. And then, it's just the circle of affordability. it's especially tough when you have that income stream somewhat restricted at the moment it starts to make the underwriting a lot more difficult.

Are there things that new development can bring to these communities that would be an asset? And not just, looking at things from the liability I think the right tenant mix is really the secret sauce to any sort of redevelopment of an area not just a Pacific particular site, but an area and community. I think, asking around, talking to your local community, figuring out, what really the needs are the idea of bringing in a major. Grosher sounds great and it probably will add a lot of traffic and access to cheap, affordable food, but at the same time, it could also displace a lot of local businesses and restaurants that have made the community what it is years. And so it's a balance, it's a balance of both but reaching out to community, understanding their needs, I think is the first step and seeing what's viable options relative to the right type of tenancy in the right, area. Is there a lot of effort then on personalizing the project to the community doing pre, planning meetings with the neighborhood groups. What is out for you guys? It starts on many different levels depending on the process. I can say that LA has definitely made a name for itself in terms of having a lot of different stakeholders as part of the process. And so getting out in front of that early on will definitely help smooth out the process. The last thing you need is a bunch of different community members showing up at an entitlement hearing and voicing opposition for various different reasons. And so really getting ahead of that. And identifying, who these key stakeholders are and what their needs are and what the community sort of evolution looks like and what your plans are. And aligning the development plan with their goals is usually a step in the right direction. It can really streamline the process.

Absolutely. I'm thinking about some of the older buildings that might be rehabbed. Is that something that you guys are looking at as well? In terms of not just cost standpoint, but carbon footprint infrastructure that might be in place for some older buildings being, older residential buildings being repositioned or older buildings of other uses being converted to residential. Adaptive reuse is an ever changing policy in Los Angeles. I think they're actually in the process of overhauling the current ordinance now and expanding it beyond the downtown historic area. It certainly has a lot of advantages, there's usually a speed to delivery. You don't have to tear down a building, you don't have to dig a hole, you don't have to build a superstructure so that speed of what you're doing is usually a little faster and can shave some money off the cost of the project. But at the same time not every building is equal. And assumptions of the things that can really kill the design and construction process. Every time you peel back a layer of the onion, it might get uglier and uglier every time you get closer to the center. It's certainly a different process. If you're looking at an existing building and looking at converting it, repositioning it, really doing a lot of due diligence and not making very many assumptions and going into it conservatively is the right approach. Everything from a failing structure to a failing roof to leaking basements to aging MEP systems or outdated electrical service. There's situations where utility providers are saying, you're connected on a very old circuit and that old circuit can't support this proposed use that you're planning on doing whether or not the service is grandfathered or not. And so literally everything needs to be highly scrutinized to have it be viable because you really don't want to start a project like that and then get caught with your pants down halfway through it can really, make for an ugly situation.

I can imagine we don't have as much of a track record for rehabs as we do for ground up new construction. I mean, seismic retrofit has been pretty standardized in LA since, 94. But the seismic retrofit process is one of many in terms of everything you have to look at an existing building. Is there a particular type of building that, would be a good candidate for reuse? Are you seeing any commonalities in, what's out there? Yeah, you have to kind of look back at the fundamentals, If you're thinking about converting a building from office to residential, is that community really supportive of residential use? Is that ground floor street presence really conducive to ground floor apartments? What is that parking looking like? Where did these residents go? It's not just providing parking throughout the day, but also at night. So the parking question is almost inverted. Is there enough services and amenities in the community? Is there a place to get coffee? Is there a place to go to the grocery store to pick up your dry cleaning in the area? Those are questions that we get a lot. And then from a building, structure perspective , most people don't want to live , in a converted office building with a glass tower, and so architecturally does it support kind of a more warm and friendly residential purpose. But also the floor plate size, what does that vertical transportation look like? No one really wants to sleep in a dark bedroom, but there's creative ways that you can bring light and air into a deeper unit, given the floor plate. But there's always design challenges opportunities in some ways, depending on the floors. And overall efficiency, most adaptive reuses are not as efficient as new construction. And so what are some creative uses that you can do with that sort of middle, dead, dark area in the center of a building, whether it be storage or amenities, or, way to cluster the new MEP infrastructure around the core, or, common bathrooms, depending, so understanding the bones and the premise of the building, both on the exterior skin perspective, but also from the interior floor plate. Is usually a good place to start if the community can support the use that you have in mind.

Exactly. Such an interesting challenge. Do you think are we seeing the beginnings of this as a trend? Or is it, kind of a passing thing? I think there's some great examples of some successful adaptive reuse projects in LA, especially on the historic side of things. There's been a lot of movement downtown. There's a lot of good advocacy groups out there trying to help raise awareness and streamline the new decision makers relative to adaptive reuse because it's not The same as new construction, there should be a, specialized expedited process. Not everything applies when you're dealing with different agencies. Yes the fire department has very specific code or requirements, but at the same time, when you're dealing with a hundred year old building that may be historic or not it's really just not conducive. I think the community and the city at large needs to make a decision. Are they going to support adaptive reuse or are we the type that, we're not going to be flexible on some of these codes and we just have to tear it down and start over? It's sometimes boils down to being that simple. When it comes down to cost and the limited income that you can get from some of these projects , all the different bringing systems up to current code is sometimes just not viable.

Certainly. So do you think that the municipalities are they playing catch up right now, trying to figure out the processes I think most are. There's a lot of beloved buildings in every community and understanding what those are as soon as you file a demolition permit for a building you can get a lot of uproar from the community. And so at the same time, it's like, okay, well. We need your help to renovate this building to keep it for what it is and to reuse it in a simple way and whether it could be something as simple as parking requirements or setbacks that, in some situations, these older buildings could be overbuilt which is something that you couldn't build if you tore it down and started over. And so there's a lot of opportunity there and unlocking potential value.

As we kind of wrap things up, what would you say then are some bright spots out there for the housing market? I'm seeing the interest rates are, kind of flattening now. Things are maybe stabilizing. Are you feeling like some of that pent up demand still there? Are, we looking at a better 24? I guess it depends on the market and exactly kind of which sector you're talking about. I think multifamily is certainly going to have some headwinds ahead of it, even throughout 24.

A lot of the analysts are saying that, maybe we'll start to see some uptick and, restoration of some of these rental growths that we saw the past few years towards the end of 24. Right now it's still looking like a downtrend. But then again, that's on average nationwide. Every coastal community is a little bit different. Even some major cities in the central area as well. I think, understanding what the market dynamics for apartments are understanding what flexibility you have unlocking some of those incentives and those TOCs type of areas. Or value extracted from an existing building can really help. Normally in these situations, there's a fleet to luxury product and trying to juice as much as we can on the income side, but even that has its own limitations. The supply chain and construction costs , there's some things improving. I think the market is getting more competitive out there. The projects permit starts are certainly starting to slow down. So the competition is coming back, but there still are some supply constraints, especially on the electrical component side. It's very difficult to get any major electrical equipment in the better part of 12 to 18 months. There were so many cranes up for so long and I think builders just got used to, a certain level of development. Now, the things have slowed down for a time. Are you feeling like they're getting a little hungrier? Are there rates coming down at all?

As the financial markets kind of tighten up the flexibility of new developments certainly slowing down. And I think as that pipeline starts to slow down on the construction side that competition starts to come back. So there's always a push and pull there. As much as they don't want to realize that it's all cyclical. And I don't think we've seen the worst of it yet in terms of the interest rates that have been rising over the past few years. I think it's going to get a little bit worse before it gets better. Well, fingers are crossed. We'll see what happens. Thank you so much, Alex. I really appreciate your insights. It's such an interesting time particularly multifamily in your world here. So thank you. there anything else you'd like to add before we step away? No I appreciate it. I think, everyone's opportunities are a little different in every market, but , it's times like this, there's opportunity out there as well. And so it's really a reliance on fundamentals and not making too many assumptions out there. All right. Well, we'll leave it there thank you again, Alex. Be sure to follow the podcast for more developments on architecture and visual design. We'll see you next time.