Real Estate Experts Urge SoCal to Keep Businesses, Residents
by Jennifer D. Duell
California needs to encourage companies to stay rather than migrate to another state, declared Robert Maguire, chairman & co-CEO of the newly established REIT Maguire Properties. "It's an immediate concern that needs to be addressed," he said at CPN's annual Southern California Property Opportunities conference.
Maguire was the keynote speaker kicking off an event that largely, though not solely, addressed Southern California's ability to attract and retain businesses and residents. He and others during the event, which was held at the Century Plaza Hotel & Spa on March 23, discussed such issues as the lack of quality housing, the importance of a cohesive government and their impact on real estate.
Regarding residents, Maguire pointed out that Los Angeles and the surrounding areas are home to a growing creative class, as explained by Richard Florida's book The Rise of the Creative Class: How It's Transforming Work, Leisure, Community and Everyday Life.
According to Maguire, it is important to foster the creative class and provide an environment where they want to live and work. "There is a potential to make a 'place' in Downtown," he said. But the emphasis must be on making Downtown an exciting and attractive place for the creative class. "The activity in downtown Los Angeles can only be described as explosive."
On the other hand, Southern California's shortage of affordable housing impacts the region's ability to stay competitive. Maguire expects that most of the new housing will be created in downtown Los Angeles.
All Eyes on Sacramento
The panel that followed, a group of economists and business experts, spoke on "Southern California's Business Climate: Sunny or Partly Cloudy?" They believe Southern California's diverse economy and wide base of industries will continue to bring new talent and jobs to the region.
But the panel, moderated by Stan Ross, retired vice chairman of Ernst & Young L.L.P. and chairman of the University of Southern California Lusk Center for Real Estatecolor>, agreed that the region has been challenged during the past several months.
"We've lost so many jobs, both high-paying and low-paying jobs, and those that support Latino families," said Larry Kosmont, president & CEO of Kosmont Cos. "We've not only lost jobs to less expensive states like Texas but also to more expensive states like New York."
However, the benefits of doing business in Southern California outweigh the risks, believes Susanne Trimbath, a senior research economist with the Milken Institute. She pointed to the state's proximity to a diverse business base, its international link and a skilled labor force. She also praised Southern California's creativity and innovation. "I remain optimistic about the quality of the region," she said.
Looking forward, aerospace and technology will be strong performers this year, predicted Jack Kyser, senior vice president & chief economist for the Los Angeles County Economic Development Corp. And the ports of Los Angeles and Long Beach will continue to expand. However, Kyser has some concerns about the healthcare and entertainment industries.
There are other clouds on the economic horizon. "The outlook for Southern California is more sunny than cloudy, but we've got to watch what happens in Sacramento," Kyser said. "A lot of our problems originate in Sacramento."
Kosmont added: "We have set a political system and political leaders that are out of sync with the populations." He pointed out that California's legislature cannot be counted on to solve problems. Instead, difficult situations must be solved by passing propositions. "We need to redo the way we select leaders so we can resolve issues in a rational process," he said.
Like Maguire, the panel stressed its concern for the cost of living in Southern California, which has not yet been addressed by California's political leaders. The lack of affordable housing, coupled with continued population growth, is a looming crisis. "We have to start thinking in terms of housing, jobs and transportation," Trimbath said.
Ross noted that the University of Southern California is having trouble attracting faculty because they cannot afford to live in the area. Kosmont placed much of the blame on anti-growth measures and greed. He explained that municipalities across Southern California made a mistake in encouraging retail development instead of housing development.
Residential Requirements
The government might not be addressing the need for housing, but developers are. For several years, retail projects represented the bulk of infill and redevelopment in the region. Today, however, most projects include a residential component, according to Gerald Katell, president of Katell Properties and moderator of the panel "Filling in the Blanks: Infill Development Trends."
For example, J.H. Snyder Co. is developing the mixed-use NoHo Commons, adjacent to the Lankershim Boulevard MTA subway station in North Hollywood. The $218 million, 23-acre, multi-block site will add 716 units of rental housing, plus 158,000 square feet of retail and 200,000 square feet of office.
The vision was originally primarily for entertainment and retail, according to Cliff Goldstein, a partner with J.H. Snyder. But Goldstein saw something different when he first looked around the site. "The first thing I saw was housing," he recalled. "There was a need to build greater density with apartments, lofts and retail."
When NoHo Commons is complete, Goldstein believes it will be a place for people to work, live and shop, a model for Los Angeles. However, he noted that all infill projects have some level of risk. "There is a need for infill development, but I would express some caution," he said.
The good news, though, is that there are fewer cases of NIMBYism (not-in-my-backyard syndrome) today than in the past, according to the panelists. "I would go as far as to say that some communities are even BIMBY--build in my backyard," Goldstein said.
Also under way is Trio, a mixed-use project Shea Properties is developing in downtown Pasadena. Trio will provide some much needed housing for the area, which has not seen residential development in several years, according to senior vice president Don Gause.
Downtown Los Angeles is seeing its own share of infill residential development. The Lee Group recently completed the Flower Street Lofts, one of the first residential projects in the central business district. "Flower Street Lofts is one of the most creative things we've ever done," said president Jeff Lee.
And then there is the Grand Avenue project, which involves the redevelopment of eight acres around the new Walt Disney Concert Hall. It will cost about $1.2 billion, and when completed the project will offer 3.2 million square feet of retail, residential and entertainment space. However, an exact plan has yet to be determined, and several firms are competing to be awarded the title of master developer.
"I think the project will do a lot to unlock the energy in Downtown," said Martha Welborne, managing director of the Grand Avenue Committee.
Boutiques, National Firms Can Co-Exist
A different kind of energy was unleashed during a debate on the merits of boutique brokerage firms versus large national firms. "We like the idea of competing against big firms," said James Travers, president of Travers Realty Corp.*ONCOR International, during the "Evolution of Brokerage Services" session, moderated by Lewis Horne, executive managing director of CB Richard Ellis Inc.
Travers noted that smaller firms have the ability to gather resources quickly so they can be more responsive, although he admitted the larger companies have power and influence. "It's a big challenge for a small boutique to play ball in the big leagues," he said.
Robert Osbrink, president of Grubb & Ellis Co., commented that his firm has focused on the challenge of entering markets that are dominated by boutique firms. He said that having a strong leader with integrity is the best way to differentiate a firm. "It all goes back to the relationship. The wink and the nod and the deal behind the table dust doesn't happen anymore."
Certainly, both boutique and large firms are struggling to price services that are more consultative than transaction-oriented. And both are fighting to serve their clients. "Clients want more for less, and we have to find ways to give that to them," Horne said.
And neither could discount the importance of good brokers. "It always comes down to the quality of the broker," said Andrew Ratner, executive managing director of the West Coast region for Cushman & Wakefield Inc. His firm, for example, was able to bring in more business and revenue with fewer brokers in 2003, illustrating the value gained when brokers multi-task and are more proactive in taking care of clients.
Similarly, John Kerin, managing director of Marcus & Millichap Real Estate Investment Brokerage Co., has seen a huge change in how investment brokers go about their daily business. "Our job now is to get in front of clients, ask them what they want and then figure out a way to give it to them," he said.
Hot Competition, Rising Prices
Investment brokers, though, have no shortage of opportunities, as discussed during "Who's Buying & Selling in Southern California?" The session was moderated by Michael Van Konynenburg, president & CEO of Secured Capital Corp.
Philip Hench, a managing director with CB Richard Ellis Investors L.L.C., lamented the lack of value-added opportunities in the office sector. "There's an element of permanence to the run-up in values," he said. "The value of office assets is overheated."
Triple Net Properties L.L.C., however, wants office assets. "We're selling out of retail and looking at office," said president Tony Thompson.
With other investors feeling the same way, cap rates might just stay low. "We think we'll see a lot of low cap rates because assets are still selling at below replacement cost," said Joseph Mani, a principal with Mani Brothers Real Estate Investment.
In fact, it is increasingly common to see cap rates in the 7 percent range, according to Jeremy Fletcher, senior vice president & CEO of Beacon Capital Partners West. And some are even lower. "We scratch our heads on occasion at the prices," he said, pointing to recent bids on 101 W. Broadway in San Diego that exceeded $300 per square foot with a cap rate of 6.2 percent.
"I am astounded by what's happening in San Diego," added John Miller, a managing director with Tishman Speyer Properties. "San Diego has never seen rents that support these kind of prices."
Other parts of Southern California are also attracting investors. Maguire Properties was among a couple of firms to enter Orange County recently. Its purchase of Park Place, with more than 1.7 million square feet of office and retail, vaulted it to fifth position among county office landlords. It plans to invest another $425 million in the region over the next three months.