I sure hope Rich Marr can be taken at face value...
Downtown Downturn
By DANIEL MILLER - 2/4/2008
Los Angeles Business Journal Staff
Boosters have long joked that the official bird of downtown is the crane. But perhaps not for much longer. Not only are developers of smaller projects facing uncertain times, but two of the most significant projects in downtown Los Angeles are experiencing financing complications, highlighting a weakening commercial real estate market.
Word that the $3 billion Grand Avenue mixed-use redevelopment project has yet to secure a construction loan and that the Park Fifth high-rise proposal is still seeking financing is raising eyebrows in the real estate industry.
“Downtown is still strong, but is it going to continue to expand at the rate it has been? No,” said Mike Guterman, a principal at Highland Realty Capital Inc., a commercial real estate finance firm. “High-rise construction lending is a four-letter word today.”
Many developers are loath to admit it, but the downtown boom has slowed – at least temporarily. Aside from Grand Avenue and Park Fifth, several small to midsize downtown residential projects have been put on hold amid the credit crunch spawned by last summer’s subprime mortgage meltdown. And commercial real estate lenders now require developers to pony up a more significant portion of equity to get construction loans.
Last fall, for example, a deal collapsed to sell the retail space in building that includes downtown’s new Ralphs Fresh Fare supermarket, despite the fact that the market has been a big success – and it provides an assured stream of lease income.
“There has been credit tightening and it has been impacting the commercial projects. They are being held in abeyance until the financing is clearer,” said Delores Conway, director of the Casden Real Estate Economics Forecast at the USC Lusk Center for Real Estate. “I know a number of projects are being delayed and they are just waiting.”
Grand Avenue
The hiccups that Grand Avenue is experiencing represent perhaps the biggest turn of events downtown. While the target completion date of 2011 for the first phase of the Related Cos. project has not changed, the project will not break ground until the summer. The ceremonial groundbreaking had been scheduled for October 2007 and postponed three times.
Bill Witte, president of Related of California, a unit of New York City-based Related, said that his company has not yet secured a construction loan and wouldn’t until this summer after it completed drawings on the first, $900 million phase of construction. And when it does secure the loan, the terms will be much tougher than usual.
Bob Safai, a lending expert at commercial brokerage Madison Partners, said that the “loose underwriting” of the last few years has disappeared. A few years ago, a developer could put down as little as 8 percent in equity to get financing to build a project. Now, developers need to pony up about 30 percent, Safai said. Even companies as sturdy as Related. In fact, Witte said his construction loan will be “in excess of $600 million” and Related and an unnamed equity partner will put down in excess of $300 million to secure it.
“There is no question financing is more difficult today,” Witte said. “It doesn’t mean it’s not available, but the underwriting is more conservative. The difference is we are still proceeding with the same schedule to get done.”
Guterman said a company not as strong as Related – which built New York City’s $1.1 billion Time Warner Center – wouldn’t even have done that well. Most lenders, he said, are not interested these days in funding condo projects. “Related is the 900-pound gorilla and all lenders are looking to finance better, higher quality projects with higher quality borrowers,” he said. “For the normal developer who has to raise equity and debt and mezzanine (financing), it’s a different world.”
Grand Avenue’s residential component includes 390 units in two Frank Gehry-designed luxury condo towers. The project at Grand Avenue and First St. will also include a Mandarin Oriental hotel and a 16-acre park. Activity has begun at the site, with lead paint abatement work commenced recently. The demolition of the parking garage on the site comes next.
Park Fifth
Near the Grand Avenue project site atop Bunker Hill, the developers of the 76-story Park Fifth mixed-use project still are getting their entitlements and also are apparently still putting together financing.
The $1.3 billion project next to Pershing Square would include more than 700 condo units, retail space and a 234-room luxury hotel. It is being developed by Park Fifth LLC, a partnership of Houk Development Co., Namco Capital Group Inc. and Africa Israel Investments Ltd.
Brent Sprenkle, a local commercial real estate broker with Sperry Van Ness Commercial Real Estate Advisors, said that a “potential investor” to the project had asked him to review the “debt currently on the property and the overall value of the property.”
“The big risk is timing and the fact that everybody has serious and deep-rooted concerns over the condominium market,” said Sprenkle, who was first approached by the potential investor in December but has yet to present a final report. “The other concerns are construction costs and whether or not the full entitlements will be granted for the proposed project.”
Park Fifth developer David Houk was said to be out of the country and was not made available for an interview. But project manager Rich Marr maintained that “all of the funding is in place for the project to move forward,” though he said the project will not have a single “master loan” for construction; Related is seeking a master loan.
“We have the commitments in place in order to initiate construction and we aren’t going to start something we aren’t going to finish,” said Marr, adding that he could not disclose the make-up of the project’s financing because of confidentiality agreements.
Marr said that since July, the project has taken more than 300 deposits for units. “If you go and try to get a straight construction loan for a project it is exceedingly difficult,” he said. “There are other ways to get to that same result. We’ve taken one we feel is an appropriate response to market conditions. This is a big project and you have to make the necessary moves to keep it moving forward.”
Small projects
The success of smaller residential projects downtown may be more closely tied to demand for housing downtown. And at the moment, the marketplace is tumultuous. Developers have taken to offering big incentives to move units. For example, MJW Investments has advertised free leases of Mini Coopers to buyers of units at its Santee Village project in the Fashion District. Developers are offering up to $40,000 in concessions – by way of unit upgrades and the waiving of homeowners association fees.
The stalled Ralphs building sale highlights the trouble. Mark Tarczynski, a senior vice president at CB Richard Ellis Group Inc., who has the listing on the property along with other CBRE brokers, said owner CIM Group Inc. had a long-term strategy to sell the property soon after completion.
The grocery opened last summer to much fanfare and brisk sales on the first floor of the Market Lofts project at Ninth and Flower streets. It is downtown’s only supermarket and its opening was a milestone for downtown. Moreover, the 56,000-square-feet of retail is fully leased with Cold Stone Creamery and The Coffee Bean and Tea Leaf among the tenants.
The retail and parking portions of the project were put on the market last July and a buyer was selected for contract in August. But that deal came apart in October because the “buyer couldn’t close because of financing,” Tarczynski said. “Everybody is having these problems.” The property was put back on the market Jan. 24.
Still, some projects in the area have moved forward amid difficult circumstances. For example, in December 2006, Anschutz Entertainment Group Inc. lost its residential partner, KB Urban, on the L.A. Live project, but got back on track by mid-2007 with new partner MacFarlane Partners LLC, which invests money for the giant California Public Employees’ Retirement System.
The convention center hotel portion of AEG’s massive mixed-use project is under construction and last fall the company delivered the first portion of the project, concert venue Nokia Theatre.
In the end, the presence of large builders such as AEG and Related in the marketplace demonstrates deep pockets are sticking around downtown, which could give the area a much needed boost in the eyes of investors and lenders.
While the market is feeling the brunt of the credit crunch at the moment, Tarczynski is convinced that downtown will come through this rough period and emerge stronger. “The money is out there. The question is, when will the financing markets settle down? I am hoping it will clear up in the next quarter. That will mean we’ve had six months to work through this,” he said.
“This market is going to be a great market by 2010. If it isn’t a 24/7 city it will be really close.”
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), the more likely these projects will go forward because of the belief (that I have at least) that the housing market will ease.
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