Rising construction costs for LA multifamily properties are reshaping the investment landscape. Combined with SB 8’s impact on development, existing buildings are becoming increasingly valuable.

The New Reality of LA Multifamily Development

If you own an apartment building in Los Angeles, rising construction costs for LA multifamily mean you’re sitting on an increasingly valuable asset—not just because of location, but because building new competing supply has become extraordinarily difficult and expensive.

Two major factors are driving this: skyrocketing construction costs and legislation like SB 8 that makes redevelopment of existing apartment buildings financially unviable.

Construction Costs Have Exploded

Building new multifamily in Los Angeles has never been more expensive:

Hard Costs

• Labor shortages: The construction workforce was decimated during the 2008-2012 downturn and never fully recovered. Skilled tradespeople are in high demand.
• Material costs: Lumber, steel, concrete, and finishing materials have all seen significant price increases since 2020.
• Subcontractor availability: Good subs are booked out months in advance, and they can be selective about which projects they take.

Soft Costs

• Permitting delays: LA’s building department is notoriously slow, adding months or years to project timelines.
• Design and engineering: More complex code requirements mean higher professional fees.
• Carrying costs: Longer development timelines mean more interest, taxes, and insurance during construction.

Current Numbers

New ground-up multifamily construction in LA now costs:

• $400-600+ per square foot for podium/wrap construction
• $600-800+ per square foot for high-rise
• $250,000-400,000+ per unit all-in development cost

At these costs, new construction only pencils at the highest rent levels—luxury product in prime locations.

SB 8 and the Replacement Unit Requirement

California’s SB 8 (Housing Crisis Act extension) was intended to protect housing and streamline development. But one of its key provisions has had a chilling effect on redevelopment:

The Replacement Requirement

If you demolish an existing apartment building, you must replace all existing units at comparable affordability levels in the new development. This means:

• A 10-unit building with below-market rents can’t be torn down and replaced with 20 market-rate units
• You must include 10 units at the same rent levels as the demolished building
• This dramatically reduces the economic benefit of redevelopment

Why It Doesn’t Pencil

Let’s look at a real example:

Existing 12-unit building:

• Current rents: Average $1,500/month (RSO-controlled)
• Land value: $3,000,000
• Building value: $1,500,000

Proposed 30-unit replacement:

• Construction cost: $12,000,000 (30 units × $400,000)
• Must include 12 units at ~$1,500/month
• Only 18 units can be market rate ($3,000/month)
• Blended rent: ~$2,400/month average
• Annual income: $864,000
• At a 5% cap, value: $17,280,000
• Total cost: $16,500,000 (land + construction)
• Profit margin: Minimal, with significant risk

Compare this to simply holding the existing building, which generates steady cash flow with no development risk.

The Double Whammy: New Construction Under Rent Control

Making matters worse, new construction in LA is no longer exempt from rent control in perpetuity. Recent changes mean new buildings will eventually fall under RSO, further reducing the incentive to build.

What This Means for Existing Building Owners

Your Building’s “Moat” Is Widening

In investing terms, a “moat” is a competitive advantage that protects your asset. For LA apartment owners, that moat is getting wider every year:

• Limited new supply: Fewer new units being built means less competition for tenants
• Replacement cost advantage: Your building cost far less to acquire than it would cost to build today
• Zoning protection: Your existing use is grandfathered; new development faces higher hurdles

Renovation vs. Redevelopment

Smart owners are focusing on renovation rather than redevelopment:

• Interior upgrades to capture rent upside
• ADU additions to increase unit count without demolition
• Energy efficiency improvements to reduce operating costs
• Amenity additions to attract and retain tenants

Impact on Buyers and Sellers

For Sellers

• Your building is worth more than replacement cost—price accordingly
• Buyers understand the supply constraints and will pay for well-located assets
• Don’t undervalue your property based on historical metrics

For Buyers

• Existing buildings offer better risk-adjusted returns than development
• Focus on properties with renovation upside rather than redevelopment potential
• Understand that you’re buying into a supply-constrained market

The Zoning Challenge

Beyond SB 8, LA’s zoning creates additional barriers:

• Density limits: Many areas are zoned for far fewer units than the market demands
• Parking requirements: Expensive parking structures add to development costs
• Height restrictions: Limit the ability to spread land costs across more units
• Discretionary approvals: Add time, cost, and uncertainty to projects

Looking Ahead

Several factors could change this dynamic:

• SB 79: New transit-oriented development rules may unlock some sites
• Construction cost stabilization: If material and labor costs moderate
• Zoning reform: Ongoing efforts to allow more density
• Interest rate changes: Lower rates could make development more feasible

But for now, the fundamental reality remains: existing LA apartment buildings are increasingly scarce and valuable assets.

Quick FAQs

Q: Does SB 8 affect all properties?
A: SB 8’s replacement requirements primarily affect properties with existing residential units. Vacant land or commercial conversions may have different rules.

Q: Can I still add units to my building?
A: Yes—ADUs and other additions that don’t require demolishing existing units are generally allowed and encouraged.

Q: Will construction costs come down?
A: Unlikely to return to pre-2020 levels. Labor shortages are structural, and code requirements continue to increase.

Want to understand how these dynamics affect your property’s value? Request a valuation.

Understanding how construction costs affect LA multifamily values can help you make better investment decisions. Contact me for a valuation that accounts for current replacement costs.