Overbuilding in Glendale

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Big developers make money by building huge projects. Therefore, they make choices about where to build based more on where they can, as opposed to where they should build.

In LA, the result of this kind of thinking is the apartment building boom currently going on in just three neighborhoods: Hollywood, Downtown, and Glendale.

There are literally thousands of high-end apartments under construction in each of these areas. For example, check out Curbed’s piece detailing the 10 huge projects going on in Glendale (with the 11th just announced yesterday).

How does this kind of insane building happen?

Developers look at comparable rents in the area. They look at the cost of land and construction. And they can estimate the operating expenses. So, they can get a reasonable estimate for what the yield will be on the money used to develop the project.

The catch? All of the developers are looking at their own projects in isolation, without taking into account the effect on the rental market of so many units coming on-line at the same time. In real life, all those units are going to be competing with each other for tenants.

Ah, but maybe they can just lower their rents, accept a lower yield, and move forward, right?

Wrong. The construction financing for these projects often requires that projects not lower their rents. In addition, the terms of the financing often require that the tenant quality (credit score, income, etc.) not drop below a certain threshold as well.

What’s a poor developer to do to fill his building when there’s competition all over the place? He can’t accept lower quality tenants and he can’t drop the rents. Here’s what he does: Offer insane move-in incentives (no security deposit, multiple free months, cosmetic changes to the apartment, etc.).

And, indeed, that’s what’s happening: Over the weekend, a good friend of mine announced to me, without prompting, that he had just negotiated an insane move-in deal on a newly-constructed apartment in Glendale (no security deposit, three months free, upgrades to the unit, etc.).

I believe this is just the beginning; Glendale, Hollywood, and Downtown are going to be good places to rent for the next few years, assuming you have good credit and income.

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