It seems that the city of LA is finally moving in the right direction.

Currently, regulations have been relaxed to make it easier to convert the vast number of vacant commercial buildings into residential units.

According to the 'Citywide Adaptive Reuse Ordinance' that took effect in February, commercial buildings that have been completed for over 15 years can now be converted into apartments with just the approval of city officials, without the complicated city council review.

The previous ordinance from 1999 only applied to downtown buildings constructed before 1975.

The new ordinance has expanded this to cover all of LA. Offices, factories, retail spaces, and even parking lots can now be converted for residential use.

As someone working in the real estate industry, I find this news encouraging.

This is a rare approach that is closer to a market-based solution.

Instead of adding regulations, it reduces them. In fact, this is a sight that is hard to find here in California.

Currently, there are over 50 million square feet of vacant office space in LA.

Since the pandemic, remote work has become established, leading to a structural decrease in office demand.

Vacant office buildings are dead assets that only incur maintenance costs.

From the perspective of property owners and the city, this is a negative situation.

Tax revenues decrease, local businesses suffer, and cases of homelessness and illegal occupations are on the rise.

On the other hand, LA is one of the cities in the U.S. facing the most severe housing shortages.

LA and Long Beach have made the list of 'the hardest cities in the world to buy a home.'

Given the mismatch between supply and demand, converting vacant offices into apartments is a straightforward solution.

However, the problem lies in the practical barriers.

First, there are high interest rates. Although the Fed has lowered rates, they are still at a high level.

The financing costs for purchasing and remodeling buildings eat into the project's viability.

Second, construction costs are rising. The prices of materials and labor have all increased.

With the tariff increases from the Trump administration, the prices of steel and aluminum have also surged.

Third, there is a labor shortage. Finding skilled construction workers is like searching for a needle in a haystack.

Ironically, the increased immigration enforcement could exacerbate this issue.

Fourth, and this is key, is the Measure ULA tax in LA. This tax, known as the mansion tax, imposes an additional transfer tax on high-value real estate transactions exceeding $5 million.

This tax significantly eats into the ROI of large conversion projects.

The tax introduced by the progressive side to solve the housing problem is ironically hindering housing supply.

Is there anything more ironic than this?

What if such projects were to take place in Texas? There is no state income tax. Construction regulations are relatively lax. The labor market is flexible.

The feasibility of the same project in Texas compared to California is like night and day.

In fact, the median rent in the LA metro area has hit a four-year low of $2,167.

A decrease in rent means that expected profits for developers are also declining.

With costs rising and revenues falling, there is no way for the project to be viable.

This is why experts say that tax reductions or financial incentives are needed, similar to what is seen in New York, Washington, and Boston.

Simply easing regulations is not enough; substantial financial incentives must be in place.

Still, the first step is meaningful.

Developer Garrett Lee has already begun converting an office tower near downtown LA into approximately 700 apartment units.

In Sherman Oaks, a project is underway to convert the former Sunkist headquarters into 95 apartment units.

It is also important that this can be done with just the approval of city officials, without city council review.

Previously, changing the use of a property could take years, which was one of the biggest bottlenecks in California real estate development.

So, I believe this ordinance represents a rare policy direction in California that "reduces regulations."

That alone deserves applause. However, given the triple challenges of high interest rates, the mansion tax, and rising construction costs and labor shortages, it remains to be seen if simply easing regulations will be sufficient.

To truly be a game changer, tax incentives and financing support must follow.

Just loosening regulations and saying, "figure it out" is a half-measure. The direction is correct, but now the issues of speed and scale remain.

Whether California can solve this is honestly a mix of hope and concern.