Hoping for a Change in the Tides

[Michael Gottlieb]

By MICHAEL GOTTLIEB


California Real Estate Journal Editor

The availability of cheap financing enabled markets throughout California to take a rapid evolutionary step forward in terms of their development.

We might be dealing with the consequences of failed high-rise condominium projects, dysfunctional mixed-use developments and other projects built out of sync from their surrounding markets, but time and demographics will inevitably prove the value of these and other leading-edge projects, if not for their original developers and investors.

But the rising tide of commercial real estate investment did not lift all ships. Downtown L.A. may have gotten a 24/7 population. Orange County may now offer high-rise residential living and the Inland Empire may boast upscale amenities, but inner city communities by and large did not experience significant amounts of transformative development.

As the dust settles on the tail end of projects initiated during the last cycle, it is clear that investors and developers were willing to make big bets on tapping narrow bands of demand in established markets but were generally unwilling to gamble on less-proven, less-understood and lesscompetitive markets.

Reviewing city of Los Angeles building activity from 2001 to 2008, the city saw peaks in construction permits for new single-family, multifamily, office and retail construction in 2006, 2007 and 2008 by large margins, according to Los Angeles Department of City Planning statistics. The only outlier was industrial construction permits, which peaked citywide in 2001.

Meanwhile, the least amount of construction-permitted activity for all of the major property types in Los Angeles occurred in 2003 and 2004.

The communities of South Los Angeles and the Eastside showed little correlation to these overall trends, however. Only South L.A.'s office and industrial markets demonstrated any real correlation when the area saw the greatest office permitting activity since 2001 in 2007 - 221,132 square feet - the same year as overall Los Angeles office construction permitted peaked at 3.1 million square feet. South Los Angeles office permitting also experienced its nadir of 7,675 square feet in 2004 while office construction permits pulled citywide totalled just 947,142 square feet. South Los Angeles industrial development also peaked in 2001.

For the most part, both the East and South Los Angeles markets generally combined for less than 10 percent of the total construction permits sought in any given year in the various property types with a few exceptions.

The sad part is that despite active and dynamic discussions in the investment real estate community of the development potential of inner-city communities, none of this should come as a surprise.

But what has been surprising is the number of high-profile projects advancing in those markets recently. For example, in South Los Angeles plans are moving forward for a $1 billion project to tear down Jordan Downs, a 700-unit public housing project believed to have spawned the Grape Street Crips, and build 2,100 residential units, retail, light industrial, educational and recreational facilities. Meanwhile, a $2 billion proposal by Wilson Meany Sullivan to redevelop Hollywood Park in Inglewood into a large-scale retail and residential complex complete with a 25-acre park, had its final EIR unanimously approved by the city a week ago.

To the east, the Metro Gold Line Eastside Extension will spur significant new development by increasing property values around the eight new stations when la Linea de Oro, Edward R. Roybal opens soon as the transit agency partners with private investors and surrounding land values rise.

Chesterfield Square was long held up as the example that large, privately financed retail projects could work in Los Angeles' inner-city areas because it was the only recent example. This latest round of projects, if built, may have to bear the weight of untapped potential of underserved urban markets for some time to come.

While permitting activity is down dramatically citywide for the first three months of 2009, construction permitting has been abysmal in South Los Angeles and the Eastside, which had a combined total of new permits pulled to build 16 single-family homes, 175 multifamily units, 32 square feet of office, and zero square feet of industrial and retail.

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