The Multifamily Development Outlook: Q&A with LaTerra’s Chris Tourtellotte 

At Connect Los Angeles 2023, scheduled for May 3 at the Hotel Indigo DTLA, you’ll hear from a cross-section of Southern California multifamily leaders on the outlook for investment and development. Among the region’s most active players is LaTerra Development, where managing director Chris Tourtellotte oversees the development platform that currently has some 3,000 apartment units in the pipeline. Connect CRE spoke with Tourtellotte for his take on the current environment. 

Q: How has LaTerra been responding to some of the economic headwinds we’ve seen recently? And has it affected the company’s operations?  

A: I’ll start by saying we’re very fortunate at La Terra that that our two business verticals are residential and self-storage. Rents are strong. People still need a place to live, and in self-storage, people are still storing stuff. Self-storage is one of the best asset classes in a downturn, as is multifamily. If occupancies go from 96% to 94%, it’s not that significant of an issue.  

We’re in asset classes that perform really well in periods of turbulent economic conditions or downturns. They perform well in good markets and they perform well in periods of high inflation. From that standpoint, we’re fortunate when it comes to debt financing. Debt financing is more difficult to obtain today. And it became even more difficult just a couple of weeks ago when SVB collapsed, there was a run on the bank and a lot of the regional banks sort of tightened up a bit. So that tightened up the financial markets for everybody.  

From our perspective, though, the agency lenders are out there, life companies are out there. So there’s still debt financing opportunities. Debt funds are active and we still have relationships with regional banks and national money center banks that are still lending to us.  We’re fortunate in that regard. But we are low leverage here at LaTerra. For our apartment development projects, that could be 55%, 60%, maybe 65% is the highest for our ground up construction. I think where people are facing challenges in the multifamily space is when they have loans up to 80%, 85%. And then when they go to refinance them, there’s that funding gap because the new lender is coming in at 60% LTV. 

But it is a turbulent time. There’s no question about it. We’re spending more time on portfolio management, bringing down operating expenses where we can, focusing on retention and keeping tenants at our properties–coming in the front door, but also not leaving out the back door.  

Q: Simultaneous with the economic turbulence, there’s been a push at the state government level to increase housing supply in in California. How is that affecting the climate for multifamily?  

A: When we think about markets that have a lot of supply—maybe too much supply–coming on line in 2023, it’s important to measure new supply as a percentage of existing stock. Take L.A., for example. We have a lot of apartments in development and in Greater L.A. and Southern California. But in L.A. County, if you look at the new supply coming on line in 2023, as a percentage of existing stock it’s really 1%, which is super low. If you look at markets like Nashville, Charlotte, Austin, Phoenix and others, we’re talking 10% to 15%. That’s very high.  

California’s low. We have significant supply constraints. And at the same time, at least in L.A., we have robust demand drivers. That bodes well for our market, so we need supply. There’s a significant shortage of supply, there’s no question about it. And at the state government level, they’ve recognized that and they’ve done certain things to try to bring more housing supply on line faster. And some of that is tools to navigate through CEQA, the California Environmental Quality Act. With a full-blown Environmental Impact report, it could take you two years to get your entitlements and that’s just too slow.  

 So now we’re seeing a lot of support at the city level and with the state coming down and saying, “Hey city, if you haven’t met your regional housing needs assessment and you don’t have enough housing, we’re going to fine you. We’re going to penalize you. We’re going to withdraw funding.” So now a lot of the cities are supporting it and they’re really getting behind it, especially if you have a component of affordable housing.  

With that said, it’s still not enough. It still takes time. And there’s still red tape that needs to be navigated. 

Q: Is there a drive among lawmakers to cut through some of that red tape? 

A: There is. The Housing Accountability Act is one of the greatest tools, one of the greatest pieces of housing legislation in California that a lot of people don’t know about. And what it says is that cities must approve housing projects if they comply with all objective zoning standards. They don’t have a choice. And so that’s helpful. But you’ve still got to do CEQA and that process can still slow you down. But that’s an example of government trying to come up with mechanisms and ways to create more housing. And they did a good job.  

Then there are other tools that we’re seeing come out that that are helping speed up that process, even at the local level here. The mayor of L.A. is doing a great job trying to stimulate housing production and figure out ways to cut red tape and streamline it. So there is a desire, there is a drive.  

Some legislation is hard to pass. The unions often don’t want these streamlined mechanisms in place because they often use CEQA as a mechanism to obtain benefits and funding and things like that. And so they control a lot of Sacramento. So that’s going to slow it down. But generally speaking, there is a drive at the state legislature and at the city level to make it easier. 

Meet CRE experts like Red Oak Capital Holdings CEO Gary Bechtel by joining us in person at Connect LA on May 3 at the Hotel Indigo.