The Housing Chronicles Blog: Revival of downtown L.A. on hold

Thursday, March 13, 2008

Revival of downtown L.A. on hold

We knew it had to happen sometime; after all, the huge boom in residential development in downtown Los Angeles was operating against much larger forces in the building industry. Now it appears that the nascent boom is on hold, with one-third of planned projects side-lined and prices falling faster over the last year than either the overall counties of L.A. or Orange.

So why did so did many projects get approved and built? INSUFFICIENT DEMAND STUDIES.

Everyone thought they'd all get the entire pie, which only really happens during Marie Callendar's $5.99 pie months (February and October). It never seemed to occur to many developers and planners -- or their consultants -- that not only was the size of the overall pie limited, but that there would be competitors demanding their own slices.

In fact, this lack of demand studies -- which predict how many people can afford homes of specific price ranges in specific areas -- is what has in large part led to the overall housing bust in new homes. Ten or 15 years ago, a typical market study for a construction loan would include a demand analysis, but as the boom started getting underway those analyses were no longer requested; all builders really wanted to know were (a) what are the new home comps; (b) what are the resale values in the surrounding area; and (c) how fast will these homes sell? These kinds of studies only work during a boom.

The other thing everyone missed was the fact that redevelopment of large, downtown areas don't happen during a single boom: they happen over several booms or many years. When one looks at downtown San Diego today, it's easy to forget the boom-and-bust period that was the 1990s, when it, just like downtown L.A., was full of plans for high-rise apartments and condos that took another 10 years to come to fruition. It also took time to convince people that moving downtown was the right move, and San Diego's downtown is much smaller than L.A.'s and is situated against one of the most beautiful bays in the world.

The current pause in downtown L.A.'s redevelopment is actually part of a normal cycle for such a large area. And, while long-term trends certainly point to more people living in an urban environment, that doesn't mean it will come as quickly as chirpy brochures would indicate. That's just how it is.

From a story in the L.A. Times:

Prices of condominiums, which dominate the downtown market, have fallen more sharply here than in Los Angeles and Orange counties overall, according to DataQuick Information Systems. More than one-third of the residential projects approved by city officials have been sidelined.

Downtown's defenders say the area simply is suffering from the same housing slump that has slowed sales to a crawl and depressed prices across the country.

But some real estate analysts believe downtown's housing troubles run deeper. They say developers and planners miscalculated its appeal as a residential community, leading them to build far too many projects for the demand.

As a result, the housing market downtown could fall more sharply and take longer to recover than it might in established residential areas...

Downtown developers counter that argument, saying there are too many people working downtown and not enough places for them to live. Traffic gets worse every year, they point out, which will drive up demand for housing closer to where people work.

"I think it is absolutely inevitable more and more people will live in downtown-type locations," said James A. Osterling, a developer and the former chief financial officer of Shea Homes. "I don't think [the real estate slump] is going to kill off downtown."

And Jim is right -- over the long run.

The median sales price for homes sold downtown, almost all of which are condos, fell to $497,360 for the fourth quarter of last year, 16% below the peak reached in early 2007, according to DataQuick.

By comparison, condo prices fell 7% from their peak in Los Angeles County during the same period and 11% from their peak in Orange County, DataQuick said. The median sales price for condos in both counties in the fourth quarter of 2007 was $410,000.

Downtown's residential expansion began in 1999, when the city relaxed parking, zoning and seismic safety rules, making it easier for developers to convert aged office buildings into apartments. The wide-open layouts and spare look of the lofts, with concrete floors and exposed pipes, quickly proved popular with an adventuresome crowd.

Within a few years, developers began to offer units in the rehabbed buildings for sale, and luxury buildings were constructed from the ground up, with rooftop pools and sky-high prices.

So far, however, demand has not kept pace with ambitions, as several downtown boosters concede...

...downtown has seen a big increase in its residential population. According to the downtown Business Improvement District, the total has grown 42% in the last three years, based on a formula that figures 1.6 persons per housing unit.

The city, using U.S. census data, estimates more modest growth of 20% downtown from 2000 to 2006. But that still outpaced L.A.'s growth of 8% for that period.

"We have created a desirable place to live," said Carol E. Schatz, president of the Central City Assn., a downtown business advocacy group.

Schatz said slowing condo sales downtown simply reflected the national real estate downturn.

"As the whole region comes out of the downturn, we will speed ahead," she said. "There's no other place you can go to the opera, a Lakers game or a world-class concert" in the Los Angeles area, she said.

Downtown's growth coincided with the creation of several landmark developments, such as Staples Center and the Walt Disney Concert Hall. Coming up: the Grand Avenue project, with its hotels, offices and condos in the Civic Center. The recently opened Nokia Theatre near the Los Angeles Convention Center marked the first phase of L.A. Live, an ambitious hotel, retail and residential complex...

James Atkins, whose development firm, Portland, Ore.-based Williams, Dame & Atkins, has built two major projects downtown, is bullish on the area but acknowledges that its transformation is not complete.

From his developments elsewhere, Atkins has learned that younger people will live in edgy new neighborhoods. But a neighborhood becomes firmly established when older, more affluent people are willing to move in -- a sign that the area's safety and amenities match that of the suburbs where they'd been living.

Downtown needs even more restaurants, stores and parks for that to happen, Atkins said. "When the Westside empty-nesters arrive, that's when we'll see the real jump in the market," he said.

He added: "That process took 20 years in Portland."

And I'll bet he did demand studies!

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