Roundtable/ Urban 4
Publish Date: 04/26/2004
California Real Estate Journal
Continued from Roundtable/ Urban 3
T
he Young and the Edgy
LINDSAY: We are talking a lot about housing, and everybody moving downtown, and I am just curious – Where are they all working? Are they already downtown and replacing commuters? There doesn’t appear to be a lot of job growth.
STARK: It is tow issues. For one, in a rising housing market, downtown L.A. is the low-cost alternative.
And secondly, with two people in a household, and maybe one working in Pasadena and one in City Of Commerce, they are saying, ‘We can live on the Westside and we can both drive tow hours, three hours a day, and pay an exorbitant amount for a house. Or we could live downtown, and pay half that, and spend 30 minutes in the car.’
I think people are really starting to make location not just an economic value but a lifestyle, a commuter lifestyle.
SULSE: One of the things I think about a lot is re-sale. We are still in a world of buying, first time buyers, and buying. And we have yet to experience where retail is going to go on this whole thing. And the couple that you are talking about, where one works in Commerce and one works in Century City, that is super. What happens when those people have kids?
STARK: It is a very important point. Because the way we look at it, our fund focuses on workforce housing. We are trying to reach what we call “pre-family housing.” The people who are in their late 20s and early 30s, who have been completely knocked out of the housing market from the early ‘80s on because of [condominium] construction defect litigation, and the lack of attached product being built. We are trying to reach that bottom 20 percent of the ladder.
So we are looking at – we might not be building all three-bedroom units 0 but we will be building the 900- to 1,500-square-foot one- and two-bedrooms as well. We want moderate-income wage earners to get in there and have a little wealth generation.
SULSE: Do the demographics support a resale? That is the question. Are we continuing on a demographic trend to have the same number of people coming up to that first level to be able as we go through on the cycle?
LINDSAY: I would say no.
PEREZ: I disagree.
WEINSTEIN: [An employee of mine] tow years ago bought a condo at Bunker Hill for $150,000. He was fresh out of USC. It is now worth $400,000. There it is: empty nesters, USC students, cross-commuters, downtown workers, crash pads. Lawyers have cash pads.
STARK: Second homes.
WEINSTEIN: New York, edgy people. People from Burbank or Glendale. All these are filling up the units downtown. And only 30 percent of the units are being bought or lived in by people who work downtown.
Building Community
STARK: Is L.A. different from San Diego or Portland, where it has thousands upon thousands of units being built?
LINDSAY: I worry. We have had a perfect confluence of events that allows us to feel great about downtown housing, and it is masking something that is going on on the macro level that is pushing money into this sector, that may stop.
If interest rates move, and if they move fast, we are going to a very different environment in downtown Los Angeles. Because there aren’t that many transactions that make money, they step out a little bit further. And people are stepping out downtown. So if the market comes back, and people move back out of real estate into other alternative investment classes, you are going to see all that capital just going away, leaving. And I worry. We feel so good about downtown housing. And I am telling you, it feels a lot like Silicon Valley in 2000.
WEINSTEIN: If you start with $1 million condos, I would agree. But my price range is $250,000 to $350,000. Show me where you are going to get that on the Westside. I have owned real estate for 20 years. I have been through the cycle. I have been a receiver on 380 properties. I know real estate from the bank’s perspective. I challenge you –
LINDSAY: All I am saying is you are forgetting about an alternative, which is apartments.
TOSTA: If a community is created to exist, it doesn’t go away.
LINDSAY: Rents go down, though.
TOSTA: If you create a community, you have something. And that doesn’t go away just because the market goes away. My concern would be, if you get caught short before you finish enough of the job to have the critical mass. Where you can really lose a kind of aggregate value is you start to create a sense of place, but you don’t have enough time to finish it. You have 10 years of economic decimation.
SMITH: When we are talking about creating community, the cornerstone of that is home ownership. You are talking about a group of stakeholders who the political system listens to. That is a key dimension for downtown, and for making public investments in downtown. The politicians and government system have their attention drawn away by the virtue of the way the city council districts work, and their size. They have huge areas to worry about. And then you don’t have a base of homeowners.
STARK: There is a critical difference when you are talking about urban districts. To keep that 24/7 edge, you want to keep that turnover. Homeowners are great, but you know what – they sit at home and watch television and eat dinner, and don’t go out to restaurants.
TOSTA: Being a foreigner I can say this. One of the concerns I have is that the first housing may go up in a largely unplanned, un-visioned area. But once those folks are in, I can guarantee you that they won’t want the density, they won’t want the traffic. So the best thing to have is a well-considered plan, so when the first projects go in, they know the second, third, and 10th and 20th buildings are going in.
WEINSTEIN: But there is less traffic. I actually decreased traffic.
TOSTA: The question is, when your folks get accustomed to that, what are they going to feel about the place going in across the street?
LINIDSAY: They are all going to show up at the hearing for his next project and vote him down.
WEINSTEIN: I have all my future projects approved for the next five years.
SULSE: If there is supposed to be a blend between a 60 percent rental and a 40 percent ownership, it is not there. I can understand why – the returns are too good right now. It is as simple as that. A great example is the project in which we were involved, where it started as a rental, and it worked for nitty-gritty, down-and dirty rents, for the [Southern California Institute of Architecture collage] kids that could live four-to-a-unit. And it was a great project. But along the way the developer recognized that it made way more sense to sell.
WEINSTEIN: Who refers the borrower?
SULSE: We used to be able to say, if the market changes then we can just go back and rent them. But the reality of it is, the opportunity costs have risen, the cost to retrofit to quality is higher, and the lender can no longer look at if this works as a rental as a backup. If you want to do business as a lender, the thing underwrites as a condo. You have to make the leap of faith that the condos will sell. It’s food for thought.
WEINSTEIN: Even thought I am very passionate about downtown, I do look at that. And what I do when I look at the project, I actually project a higher interest rate. I look at my homeowner’s fees. And the Mills Act actually cut the property taxes in half. So I look at that.
I actually created a system with the assessor where I am able to offer Mills Act tax preference, not just for rentals or projects but also now for the sale of historic buildings.
So basically, for $250 a month less, the people that buy condos from our project will pay $250 less forever on property taxes per month. So I have already – basically I can have interest rates rise a little bit, and my buyers can deal with that.
So we try to find ways to anticipate that the market might change. I always look at things 25 percent below what price is going right now.
Continue to Roundtable/ Urban 5
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