Redevelopment of downtown L.A. put on ice

Urban redevelopment is rarely a pretty picture. That's because real estate cycles tend to interrupt the dreams of those builders and developers with the vision to reinterpret a downtown area. Although San Diego now has an enviable, walkable downtown, it certainly didn't get there overnight -- it took at least two (and perhaps three) redevelopment cycles to get it where is is today, and Long Beach has been trying to decide what works and what doesn't since I lived there and attended high school.

So it comes as no surprise to me that the redevelopment of downtown Los Angeles -- which could easily fit many downtown areas into one of its submarkets -- is not going to occur in just one cycle. It will be a long, drawn-out process, but perhaps that's a good thing, because five years from now homebuyers are going to be wondering how expensive it's going to be to rip out all of those granite countertops and stainless steel appliances in favor of the next big trend. From a Wall Street Journal story:

The largest private landowner in downtown Los Angeles said it may have to file for bankruptcy protection, the latest sign of how the credit crunch has frozen a multibillion-dollar revitalization of the city's downtown...

It is the latest shoe to drop for Los Angeles's downtown district, which has been the focus of a decade-long renewal project designed to convert old warehouses and office buildings into lofts, high-rise residential towers and an entertainment and retail district.

Major pieces already are in place, such as the Staples Center sports complex at the south end and the Frank Gehry-designed Walt Disney Concert Hall at the north end. The first phase of L.A. Live, an entertainment complex, opened in December. And developers have added thousands of new condominiums and rental apartments.

But some plans have stalled, threatening the goal of building out the surrounding area. The Related Cos., a national developer, missed a city deadline to break ground on a $3 billion condo and retail corridor. The first phase of the project, once slated to be completed this year, probably won't be finished before 2012 because the developer hasn't been able to secure financing. Related says the project is on hold temporarily...

And, as in other cities, the condo market has been hurt by slow sales. Condo prices in downtown Los Angeles fell to less than $400 per square foot in the fourth quarter of 2008, down $100 from the previous year, according to CB Richard Ellis...

Unlike in Miami or San Diego, the downtown area doesn't have a large supply overhang. Real-estate brokerage Marcus & Millichap forecasts that 39 new condo and 394 rental units will be added to the downtown market this year.

But while the district's troubles may reflect economic headwinds that have battered real estate nationally, some experts say downtown has also suffered from too many high-priced developments. "The price points that were projected aren't sustainable," said Raphael Bostic, a real-estate professor at the University of Southern California. "The prices you have to charge now make the returns relatively unattractive."

What does L.A. want to be when it grows up?

One of the most common complaints about Southern California is its infamous sprawl -- I once sat next to a young guy on a plane from Ohio embarking on his first visit to California, and as we were flying into LAX from the east he was amazed at how long we flew over built-out areas before landing.

But the primary reason we have sprawl is because those who live in the currently developed areas fight increased density, so new development is pushed further outward. With politicians fearing urban constituents and builder's associations unwilling to embrace one type of building over another, we remain stuck in a stalemate of short-term interests and, frankly, a type of cowardice that has in the past prevented long-term planning (which is also why we don't have better public transit or a more fully developed freeway system in Southern California).

And yet that may be changing: over the past ten years, recent decisions by the L.A. City Council have been in far greater support of increased density to house increasing population growth that will occur even if existing families simply stay put (i.e., new births). From an interesting overview in The Economist:

Los Angeles has long epitomised car-oriented sprawl. As early as 1946 the historian Carey McWilliams judged it “a collection of suburbs in search of a city”. So rare are neighbourhoods where basic needs can be met without hopping into a car or bus that estate agents tout the few where they can as “walkable”. Urban planners elsewhere routinely invoke the city as an example of what to avoid. Yet even as they struggle to avoid becoming like Los Angeles, cities such as Atlanta, Phoenix and San Jose are copying it by spreading out and, hydra-like, growing new centres.

The original metropolitan miscreant is now trying to reform itself so fundamentally that Joel Kotkin, an urbanist at Chapman University, compares it to rewriting a DNA code. Last summer the city council changed zoning rules to allow tiny apartments to be built in and around downtown Los Angeles. On March 19th it rejected a plan to put 5,600 homes on the city's northern frontier, signalling that the metropolis must now grow up, not out. From next month developers will be allowed to build blocks of flats up to 35% bigger than previously, so long as they include some cheap housing...

“You're beginning to see a neighbourhood revolution,” says Zev Yaroslavsky, one of Los Angeles' shrewdest and most powerful politicians. He gives warning that outraged citizens may add an initiative to the ballot next year that would block dense housing projects, “smart” or not. Mr Yaroslavsky knows about the power of ballot initiatives. He sponsored one in 1986 that cut the size of most new office buildings in half, and another in 1998 that virtually halted subway construction.

Planners retort that Los Angeles will continue to grow, and it is better to build new apartments on run-down commercial streets than plonk them next to bungalows or bulldoze virgin land. They are particularly keen to put people next to express bus lines or subway stops. At present few use Los Angeles' skeletal rail system—259,000 journeys are made each day, compared with 1.2m bus journeys—and the network is growing painfully slowly. If the subway cannot reach the people, the thinking goes, the people must be brought to the subway.

This theory is the bedrock on which the new North Hollywood is being built. Near the office construction site a 14-storey block of flats (it seems enormous in the San Fernando Valley) has already appeared, and others will follow. The hope is that residents will both live and work there, or walk a few hundred yards to the local subway stop. But Cary Adams, a local resident, notes the developers are hedging their bets: two giant car parks are also scheduled for construction. This is, indeed, the genetic flaw in Los Angeles' new DNA.

A big reason Angelenos drive everywhere is that they can park everywhere, generally free. Businesses must provide parking spaces according to a strict schedule. This raises the cost of doing business and hugely lowers the cost of driving. Free parking is, as Donald Shoup of UCLA put it in a recent book, “a fertility drug for cars”.

Consider the roughly 29,000 people who live in Los Angeles' historic downtown. In the past few years a mixture of childless professionals and students have moved into new lofts. They have access to southern California's best public-transport network, and are the sort of people you would expect to take advantage of it. Yet last year a consortium of local property owners revealed that just 11% normally did so, while another 17% generally walked. Almost everybody else drove.

The politicians and planners are gambling that, by arranging Angelenos in a more conventional pattern, they can change their behaviour. Perhaps it will work. But if they are wrong, an already crowded city will simply gum up.

And when it does, you might have Mr. Yaroslavsky to blame. But why should he care? Those who live in the suburbs and outside of either his district or the city limits can't vote him out -- and that, in a nutshell, is why transportation and land planning in Southern California is such a mess.

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!