LOS ANGELES | Downtown Project Rundown 6.0

[Zapatan]

Originally Posted by zonedgreg

I'm a developer. Getting a construction loan and a takeout perm loan is really hard right now - tough to pencil deals out when there's negative leverage (interest rates higher than cap rates). Lenders are stress testing everything - and it's even more complicated with a massive high rise like 1045 s olive. It's not that there's no liquidity to put to work like '08-'09.. there's plenty of money to go around, it's about the cost side of the deal mixing with the falling rents around the nation.

Pinning down where construction costs will be in a year's time for breaking ground (if you have the approvals today like 1045 S Olive or Olympic Tower or Olympia or Times Mirror Square or Tribune Tower) is tough too. Deflation is starting to show in construction costs but not as much as people would like and with covid messes still going on in China, you just have to stress test every little assumption possible which makes the deal less likely.

However, deflation of construction costs will come no matter what because we're at the point where contractors and subcontractors are looking 6 months down the road and noticing they don't have any work lined up so they'll lower their prices eventually.

Now is the time where developers are likely submitting proposals, teeing things up for approval as quickly as possible in preparation for maybe 2-3 years down the road when construction costs decrease, interest rates decrease, rents stabilize and increase and doing deals is much easier. Then I bet we'll see a flurry of high rise construction.

That's a nice outlook, thanks for the insight.

I just wonder how long these developers can hold onto sites of major projects we're all looking forward too.

Not just in LA but also all of the ones in Chicago, NYC, Seattle, SF and wherever else.

It'd be nice to see some new proposals too.

[zonedgreg]

Just depends. In the case of Mtsui Fudoson developing 8th & Fig and will be developing 8th Hope Grand, I think they've owned those lots since the late 80s so their taxes are low and the parking lot income likely covers expenses just enough so they have the flexibility to time the market right.

Lots of other developers are in the same boat where they're purchasing parking lots that make just enough money to cover taxes/operating expenses each year. In the case of the car wash on Fig/Olympic where Neman's Olympic Tower is to be developed, you're buying that not for land value but for the value of the cash flowing asset itself. So your basis is a little higher but again, you're hoping that the income can cover expenses - and in the case of this car wash, it's probably a little easier to raise prices of a car wash than to raise prices of parking when there's so many parking lots.

So the answer to your question is, unless there's something wrong with the developer i.e. liquidity issues (Oceanwide), reputation issues / unable to get permits (barry shy), or if the developer is just sick of dealing with a nitpicky city (i.e. Pasadena) the developer will likely forge ahead and develop.. sometimes they never truly know how long.. They may go in with an idea of 3-5 years ownership then breakground but maybe it takes closer to 7-10.

[citywatch]

Originally Posted by zonedgreg

or if the developer is just sick of dealing with a nitpicky city (i.e. Pasadena)

speaking of which, that city over the past 20 yrs also has had gaps in certain high visibility locations....or where vacant properties or parking lots sat unused for a long time....have been either finally filled in or are in the process of being filled in. But the one not far from that city's community college...a long closed auto dealership....remains untouched. But other deadzones have been replaced with new devlpt.

I originally thought this property in dtla, right next to an MTA station at 4th St & Hill, was almost guaranteed during the past 2 yrs to break ground. But, no, equity residential of Chicago, which did get a lot of flak from certain nearby property owners, apparently has since bailed on the proj.


ladowntownnews.com

One of the comments in the youtube vid about why dtla is so small mentioned that it's at a disadvantage because it's not near a body of water, like an ocean, lake or river. I was told the same thing by a person several yrs ago. But Pasadena is way further from the water than dtla is...yet over the past 60-70 yrs pasadena has remained more competitive or appealing. The main reason for that is, unlike dtla, more of pasadena was built for the gentry class. More of dtla has historically been aimed at the working class. Old photos of dtla from the early 1900s show that large sections of it were built for grittier industrial or commercial uses. That's why segments of LA's economy had an easier time in walking away from dtla.

https://youtu.be/oboDigfMrJU

[CaliNative]

Originally Posted by zonedgreg

I'm a developer. Getting a construction loan and a takeout perm loan is really hard right now - tough to pencil deals out when there's negative leverage (interest rates higher than cap rates). Lenders are stress testing everything - and it's even more complicated with a massive high rise like 1045 s olive. It's not that there's no liquidity to put to work like '08-'09.. there's plenty of money to go around, it's about the cost side of the deal mixing with the falling rents around the nation.

Pinning down where construction costs will be in a year's time for breaking ground (if you have the approvals today like 1045 S Olive or Olympic Tower or Olympia or Times Mirror Square or Tribune Tower) is tough too. Deflation is starting to show in construction costs but not as much as people would like and with covid messes still going on in China, you just have to stress test every little assumption possible which makes the deal less likely.

However, deflation of construction costs will come no matter what because we're at the point where contractors and subcontractors are looking 6 months down the road and noticing they don't have any work lined up so they'll lower their prices eventually.

Now is the time where developers are likely submitting proposals, teeing things up for approval as quickly as possible in preparation for maybe 2-3 years down the road when construction costs decrease, interest rates decrease, rents stabilize and increase and doing deals is much easier. Then I bet we'll see a flurry of high rise construction.

It is helpful to have the input and reality check of a developer who actually is in the daily battle to get financing, construction crews, materials at high costs and still try to make a profit.

One thing L.A. has going for it is the buildup to the 2028 Olympics. In hindsight, it was fortunate that L.A. was awarded the '28 Olympics. Paris has less than two years left. Will they complete the rebuilding of Notre Dame? Plus all the other things. Will the economy be out of the doldrums in two years? L..A. has the luxury of four extra years to get ready.

Priority #1....solve homeless crisis, and create more affordable housing, especially near transit stations. Priority #2...complete the transit projects, especially the Purple Line to Westwood and the Crenshaw Line & airport connector and then the line from West L.A. to the Valley. Possibly a northward extension of the Crenshaw line to the densely populated West Hollywood area should be considered. But all this is for the transit discussion threads.

Mr. Developer, is homelessness hurting demand in DTLA? I would imagine people don't like tents outside their luxury condos. The clear solution is house the homeless before the Olympics. I saw in the L.A. Times that the old General Hospital may be converted to homeless housing and services. A similar proposal involves the giant old Sears Building in Boyle Heights. Since homelessness is a national problem, the Federal Government and HUD needs to get more involved with funding and solutions. Local governments can't do it alone.

Zonedgreg, please continue to post your views here on market conditions, and development outlook and reality vs. hopes. Thanks.

[colemonkee]

Remember that Los Angeles is also one of the host cities for the 2026 Men's World Cup, so that is an additional boon to the local economy.

[zonedgreg]

I don't develop in DTLA but I would almost think it's not that big of an issue. It's certainly a turn off to renters but it hasn't stopped DTLA from being one of the fastest growing downtowns in the nation. Also, although the homeless issue seems to be raging on every block across the city these days, it's always been an issue in downtown and I think the renters there accept that + the crime issue.

If the renters accept it and continue to occupy the new buildings that come online, then why wouldn't developers build more? I think now also developers are starting to see that there's nowhere to go but up on homelessness + crime. Eventually the soft on crime DA will be out and replaced with someone that is harder on crime. This mayoral election felt like it was 80% focused on homelessness. We now have Measure ULA to provide tons of money to fix homelessness. So between new funding sources, new political will and eventually a new DA, I think LA/DTLA will see brighter days and developers recognize that.

Also remember the timeline developers work on. If there's a newly constructed building that becomes fully occupied today in 2022, it probably completed construction 12-18 months ago. Construction took probably 24-36 months. Before that you might have 12 months to get financing and finalize designs, line up contractors, subs, etc.. Before that you have maybe 2,3,4 years to get entitlements/approvals depending on if there's zone changes or amendments, CEQA, etc. Before that you probably have 12-24 months where you first purchase the site and then figure out what you want to develop.

That's up to like 10-11 years from the absolute first starting point purchasing the property to full occupancy of the property. No developer has a crystal ball. A developer of projects on these scales has to have long term trust in the market's fundamentals and can't pay as much attention to today's issues. You saw that even during the middle of the pandemic, developers were proposing new towers, continuing to submit for approvals, etc., sometimes even increasing the height of their proposals (1045 S Olive)

[LAsam]

Originally Posted by zonedgreg

We now have Measure ULA to provide tons of money to fix homelessness.

Do you think the extra 5.5% transfer tax from ULA on residential commercial properties will give developers pause? I'd imagine that significantly impacts underwriting of currently planned developments.

[CaliNative]

Originally Posted by colemonkee

Remember that Los Angeles is also one of the host cities for the 2026 Men's World Cup, so that is an additional boon to the local economy.

Absolutely true. Just like 1984, I don't think the Russians will attend the 2028 Olympics or the men's socker world cup in 2026. Can you imagine the Russians playing the Ukranians, even if the war is over? Russian absense didn't hurt the 1984 Olympics. Most profitable ever.

[Illithid Dude]

Originally Posted by LAsam

Do you think the extra 5.5% transfer tax from ULA on residential commercial properties will give developers pause? I'd imagine that significantly impacts underwriting of currently planned developments.

I doubt the transfer tax will change anything beyond making apartment rents 5.5% higher

[zonedgreg]

Yeah but it's just one more straw on the camel's back.. There's so many government-related fees to develop in LA that it pushes market rents much higher than they need to be. Remember, there's never really been a shortage of demand for developers to develop in LA, except maybe the late 90s to early 2000s when aerospace jobs left in droves, other light manufacturing moved overseas, LA headquartered banks consolidated and/or got bought up..

But the main reason for the affordability crisis is due to the city's zoning and land use policies it instituted on itself. Before the mid 80s, LA was zoned dense enough to have a estimated max population of 10 million people - more than NYC. Then in the mid 80s, powerful people, lobbyists, etc. got city council to downzone across the city for an estimated max population of 3.9 million because they were afraid of the soul crushing traffic that we now have today. We hovered at that population for like +2 decades so very very little development occurred relative to the city's past. But the demand to live here didn't stop so naturally a supply/demand imbalance built over 2 decades..

All the city has to do is upzone and built better infrastructure to get people from A to B better than a car can. If you upzone, you get more housing. You get more housing, rents stabilize, when rents stabilize homelessness can start to subside. And if you get people from A to B efficiently with higher capacity public transit which is more efficient than freeways, then traffic theoretically won't be as bad per capita as it is now.

[skyhigh07]

Originally Posted by zonedgreg

I don't develop in DTLA but I would almost think it's not that big of an issue. It's certainly a turn off to renters but it hasn't stopped DTLA from being one of the fastest growing downtowns in the nation. Also, although the homeless issue seems to be raging on every block across the city these days, it's always been an issue in downtown and I think the renters there accept that + the crime issue.

I rented in DTLA between 2017-2020. Compared to other urban cores, DTLA has been one of the last to experience a significant renaissance and I still think it’s pretty far from achieving that unfortunately. When I lived there, homelessness and grittiness were apparent, but I was still somewhat comfortable walking around my neighborhood.

A week ago, I visited DTLA for the first time after leaving over two years ago and to be honest things were markedly worse to the point where I didn’t want to get out of the car. There appeared to be a lot more shuttered storefronts than before and the homeless/druggies seemed to have moved up more toward Broadway, Spring and Main. There also appeared to be a lot less activity and bustle in the financial district. I suspect this is largely due the post pandemic work from home trend.

I was somewhat optimistic and hopeful about the area when I first moved there. However, I quickly realized the only positive developments were created by private investment and developers. City officials almost seemed like they were trying to thwart any attempts at revitalization. The Pershing Square debacle is a sad joke at this point. The new residential buildings and retail openings such as Apple were encouraging to see but they seemed to be remnants of plans made pre-2020… I got the feeling they may not be around much longer.

I know I sound like a Debbie Downer but this is my honest assessment of how I found DTLA after returning two years later. It’s really tough to see the silver lining there sadly. It just hasn’t rebounded as other downtowns have had and it seems to be going in the opposite direction. I’d be interested in seeing the recent stats on DTLA’s growth in terms of occupancy rates etc and if prior successes are sill relevant.

I know a lot of people in my building left during the pandemic primarily due to quality of life issues including myself. So I would be surprised if it isn’t impacting demand and growth but I just wonder to what extent. DTLA needs a radical change in policy if the ship is to be turned around. I’m not sure if throwing more money at it and status quo leadership will make the difference.

[LAsam]

Originally Posted by skyhigh07

A week ago, I visited DTLA for the first time after leaving over two years ago and to be honest things were markedly worse to the point where I didn’t want to get out of the car. There appeared to be a lot more shuttered storefronts than before and the homeless/druggies seemed to have moved up more toward Broadway, Spring and Main.

This right here is the biggest obstacle for DTLA. If people don't feel safe in DTLA they aren't going to go there. Unless this gets fixed I'm not optimistic for DTLA's future prospects. It's on Karen Bass now to fix this. She campaigned on it and she needs to deliver. I'm skeptical on whether she'll actually improve the situation in a meaningful way... but if she does... she'll have a fan in me.

[Easy]

Originally Posted by skyhigh07

I know I sound like a Debbie Downer but this is my honest assessment of how I found DTLA after returning two years later. It’s really tough to see the silver lining there sadly. It just hasn’t rebounded as other downtowns have had and it seems to be going in the opposite direction. I’d be interested in seeing the recent stats on DTLA’s growth in terms of occupancy rates etc and if prior successes are sill relevant.

I know a lot of people in my building left during the pandemic primarily due to quality of life issues including myself. So I would be surprised if it isn’t impacting demand and growth but I just wonder to what extent. DTLA needs a radical change in policy if the ship is to be turned around. I’m not sure if throwing more money at it and status quo leadership will make the difference.

I have no doubt about your honesty, but I don't think that your information is completely accurate. I've lived downtown since 2015 and while a ton of people left during the first several months of the pandemic, occupancy has returned to close to full capacity from what I see.

To me the bottom was probably in late 2020 to early 2021. Residential occupancy was reduced and sidewalk camping and drug use were allowed essentially everywhere. Residential has absolute recovered. People are still leaving but they're all replaced. Rents are flat to slightly increasing. Apartments aren't sitting empty anymore. There aren't quite as many people out and about because delivery services have eliminated many daily errands.

Office recovery may be worse than reported. I read property owners saying that buildings are approximately 50 or maybe 60% occupied, but I hear from others that many office buildings are almost completely empty even now. I don't have any firsthand experience with that so not sure who to believe.

[NIMBY Slayer]

Originally Posted by Easy

I have no doubt about your honesty, but I don't think that your information is completely accurate. I've lived downtown since 2015 and while a ton of people left during the first several months of the pandemic, occupancy has returned to close to full capacity from what I see.

To me the bottom was probably in late 2020 to early 2021. Residential occupancy was reduced and sidewalk camping and drug use were allowed essentially everywhere. Residential has absolute recovered. People are still leaving but they're all replaced. Rents are flat to slightly increasing. Apartments aren't sitting empty anymore. There aren't quite as many people out and about because delivery services have eliminated many daily errands.

Office recovery may be worse than reported. I read property owners saying that buildings are approximately 50 or maybe 60% occupied, but I hear from others that many office buildings are almost completely empty even now. I don't have any firsthand experience with that so not sure who to believe.

I guess you don't walk by the CVS on 7th and Spring on a daily basis like my wife and I do. For a while the LAPD would park a decoy cop car there moving it around that part of the block and that didn't work to deter "crime" so they stopped doing that. The corner festers 24/7.

I've lived downtown since Summer 2009 and it is way worse now than even then before the boom of development and people. Who remembers how awesome Art Walk was in 2009-2010? Sure there were homeless but not as bad as now and they were less aggressive and there were less overall criminals wandering around. It felt safer, cleaner and more fun. If you were around back then, you'd know what I mean.

Back in September as my wife and I were about to head to LAX to catch a flight to NYC, one of the neighbors got shot in the head in front of our building (a robbery), so we had to catch the Uber by going through the back alley because the front and street were closed off with the body on the sidewalk and the corner and cops there. It was a bit traumatic. When we got into Manhattan, it's like Shangri-La compared to DTLA (at least the Historic Core). We go about every 6-8 months and every time it excels. We're actually moving there this coming summer for a bit, to have a change of atmosphere.

The DTLA bright side is, the Arts District is awesome. Very clean and you feel safe walking around. Ton of new places and development happening, with something new opening up almost weekly. When we do eventually move back from NYC, we will most likely move to the Arts District. It's what all of DTLA should strive to be like.

Oh and South Park is also pretty nice, and is cleaner and feels safer than the Historic Core and Financial District too.

So to sum it up, compared to 2020-2021, yes it is better today slightly, but compared to pre-2018 is far worse and compared to pre-2014 is is far far far worse.

[citywatch]

In commercial space...which tends to command the highest rental rates (& therefore it's easier for very tall bldg projs to be aimed at office instead of residential....dtla has been a teeter totter for yrs. Or where it has been an ongoing game of 'win some, lose some'. This is an example of win some, lose some....

McKinsey Leads 72K SF of Leases at Silverstein’s US Bank Tower in LA

In the largest deal, management consulting giant McKinsey & Company agreed to take more than 19,200 square feet on the 69th and 70th floors of the 72-story, 1.4 million-square-foot skyscraper, according to sources familiar with the deal. McKinsey signed a 12-year lease and will move to the 1,018-foot-tall tower from its current offices at 2000 Avenue of the Stars in Century City.

Additionally, investment bank Lincoln International struck a 10-year lease to expand to more than 27,100 square feet at the building, adding the 67th floor to its existing footprint on the 66th floor. Another investment bank, Rothschild & Co, is vacating that 67th-floor space and agreed to lease more than 8,500 square feet on the 50th floor.

Civil engineering firm Walter P Moore also inked a 10-year lease for nearly 9,400 square feet on the tower’s top floor — deemed the “highest leased office floor in California,” according to Silverstein. Walter P Moore will relocate there next summer from the nearby Aon Center at 707 Wilshire Boulevard.

National personal injury law firm Morgan & Morgan rounded out the leases, signing for more than 7,600 square feet on the 22nd floor, where it will open its first L.A. office.

The new deals come as Silverstein wraps up a $60 million renovation program at the property at 633 West Fifth Street that will transform the entire 54th floor into a tenant lounge known as The Vista, and also modernize the 1989 building’s lobby and elevators. The World Trade Center developer acquired the U.S. Bank Tower in 2020 from Singapore-based OUE Limited for a discounted price of $430 million — about one-third less than its $650 million valuation in OUE’s 2019 annual report, albeit more than the $367.5 million that the Singapore firm paid for the property in 2013).

Earlier this year, Silverstein signed law firms Dechert and Skiermont Derby to new leases at the building spanning a combined 10,400 square feet.

Dtla has traditionally been dominated by the industry of law & legal, which is a fairly narrow one. It isn't necessarily based on the most productive or uplifting type of economic activity. So if dtla is ever able to attract a more diverse array of businesses to its west side...as opposed to the entertainment industry being drawn to its east side....that will be better.

[scania]

You are totally correct!!! I moved DTLA from Rancho Palos Verdes in 2015. The ONLY corner that is worse in DTLA is between Spring and Hill on 5th St. EVERYWHERE else in DTLA is much better. Some place 10 times better. Some of you are corny. But it’s typical for the lower income to make some of these ridiculous statements. The ones who like to call DTLA the hood,though they couldn’t afford to live here. The moderators never warn or say anything about the words they use, that’s why I can’t be warned for calling them the lower income. Lol Another reason that I have a couple of you blocked. I simply can’t take a couple of you seriously.

[citywatch]

Originally Posted by NIMBY Slayer

When we got into Manhattan, it's like Shangri-La compared to DTLA (at least the Historic Core).

NYC's mayor is recently in the news for promoting a law (don't know the details) that will allow his city's agencies, presumably including the NYPD, to require that homeless ppl no longer be able to believe their rights outflank the rights of other ppl out on sidewalks. Or the rights of shopkeepers & other businesses that have to deal with sidewalks, streets, alleyways full of homeless encampments.

Conditions like this are a disgrace & make dtla...LA....look like a major dystopia...

https://youtu.be/-vc6CHRrtH8

^ All the improvements to dt over the past 30 yrs are being offset by both negative publicity about LA's wild west streets & other turn offs like the corresponding irony of the city's increasingly high cost of living.

[BrandonJXN]

I was in downtown last Saturday for the auto show. It was packed. Coupled with the amount of people out watching the World Cup. Ate at Grand Central Market (which was packed), walked down Spring (which was filled with people of all types). I did notice that the homeless was more prevalent than before but never once did I feel unsafe or sketched out. I lived in Chicago for 5 years. I've been more scared walking down Oak Street in the Gold Coast at 5 pm than the Arts District at 1 am.

[Easy]

Originally Posted by NIMBY Slayer

I guess you don't walk by the CVS on 7th and Spring on a daily basis like my wife and I do. For a while the LAPD would park a decoy cop car there moving it around that part of the block and that didn't work to deter "crime" so they stopped doing that. The corner festers 24/7.

I've lived downtown since Summer 2009 and it is way worse now than even then before the boom of development and people. Who remembers how awesome Art Walk was in 2009-2010? Sure there were homeless but not as bad as now and they were less aggressive and there were less overall criminals wandering around. It felt safer, cleaner and more fun. If you were around back then, you'd know what I mean.

Back in September as my wife and I were about to head to LAX to catch a flight to NYC, one of the neighbors got shot in the head in front of our building (a robbery), so we had to catch the Uber by going through the back alley because the front and street were closed off with the body on the sidewalk and the corner and cops there. It was a bit traumatic. When we got into Manhattan, it's like Shangri-La compared to DTLA (at least the Historic Core). We go about every 6-8 months and every time it excels. We're actually moving there this coming summer for a bit, to have a change of atmosphere.

The DTLA bright side is, the Arts District is awesome. Very clean and you feel safe walking around. Ton of new places and development happening, with something new opening up almost weekly. When we do eventually move back from NYC, we will most likely move to the Arts District. It's what all of DTLA should strive to be like.

Oh and South Park is also pretty nice, and is cleaner and feels safer than the Historic Core and Financial District too.

So to sum it up, compared to 2020-2021, yes it is better today slightly, but compared to pre-2018 is far worse and compared to pre-2014 is is far far far worse.

My response wasn't addressing safety, it was addressing occupancy and demand to live in DTLA. I agree that safety is slightly better now than 2020-2021 but worse than anytime between 2008-2018. Way worse than when you moved downtown. And the Historic Core has borne the brunt of the decline as the city allowed camping to move west.

Still safety is worse in much of LA. I don't want to sidetrack into politics other than to point that all of the urban areas of LA are having similar issues. I completely understand why the optimism of 10 years ago has devolved into the pessimism of today. Full disclosure I am leaving DTLA next month so I'm not blind to what's happening, although I still see the upside as well.

[NIMBY Slayer]

Originally Posted by Easy

My response wasn't addressing safety, it was addressing occupancy and demand to live in DTLA. I agree that safety is slightly better now than 2020-2021 but worse than anytime between 2008-2018. Way worse than when you moved downtown. And the Historic Core has borne the brunt of the decline as the city allowed camping to move west.

Still safety is worse in much of LA. I don't want to sidetrack into politics other than to point that all of the urban areas of LA are having similar issues. I completely understand why the optimism of 10 years ago has devolved into the pessimism of today. Full disclosure I am leaving DTLA next month so I'm not blind to what's happening, although I still see the upside as well.

Yes, there are lots of upsides such as the Arts District, South Park and even Bunker Hill (even though it's kinda dead up there, it's nice, clean and safe). Unfortunately the heart of the action, the Historic Core and parts of the Financial District, which we all know have great bones and potential of being world class with all the theaters, architecture, and vibe is lagging in many areas we've all listed above. I have faith over the next 3-4 years it will all change for the better and the glory years of 2010-2014 will return 10x.

Oh yeah, if anyone who can actually do something is reading this, please do something about that 7th/Spring CVS corner. Outside of skid row and maybe 5th/Spring/Main, that has to be the worse.