DOWNTOWN LOS ANGELES - Before the economic downturn hit Downtown in 2008, local developers were rushing to entitle dozens of new projects to get in on the building craze. Most of those plans were shelved when the market tanked.
Now, after collecting dust for years, those old proposals are driving the next wave of Downtown development.
It’s unclear whether recently announced plans for several new residential building projects mark the start of a trend. If they do, the amount of new construction in the coming years will likely be limited by the availability of land that was approved by the city for development before the downturn.
What’s left of those properties appears to be going fast. Last year, Vancouver-based Onni Group snatched up a property at Eighth and Olive streets for $16.5 million. It plans to break ground this year on a 32-story tower that was entitled by the former owner.
Wood Partners recently bought a plot entitled in 2008 by CIM Group at Eighth and Hope streets, where it intends to build a 22-story edifice. In June, San Francisco-based Carmel Partners acquired a site at Eighth Street and Grand Avenue entitled by seller Sonny Astani, who said the deal was for $63 million. They followed Century West Partners, who earlier this year bought an entitled site at 1340-1360 S. Figueroa St. for $16 million. A seven-story apartment complex is now under construction.
There are several entitled sites on the market, among them a plot at 11th Street and Grand Avenue owned by Amir Kalantari, and a handful of other parcels approved for major developments that have long been sitting idle (see below for a list of entitled sites).
Large private equity funds and developers are increasingly kicking the tires on potential deals around Downtown, but they are largely ignoring sites without entitlements, said broker Andrew Tashjian of CB Richard Ellis.
Tashjian recently took a 2.6-acre Sunset Boulevard plot off the market. Although it had been described as a development site, it did not have entitlements. That scared away most buyers, he said.
“That’s why we haven’t been able to move it,” said Tashjian, who is working on a plan with the property owner to bring it back to market next year.
The Big Money
While the potential for reviving approved projects will be limited by the number of sites with active entitlements, the appetite by large investors for existing multifamily housing appears built to last.
National private equity firms and institutional investors, which direct capital for insurance companies and pension funds, have steadily flooded Downtown as the economy has improved. Those companies have primarily targeted the lowest hanging fruit — projects that stalled amid the recession and fell into bankruptcy. Such developments were available at a relatively low price, often out of foreclosure. With most of the construction completed, they were also low-risk propositions.
Distressed properties like the Roosevelt, the Brockman, Santee Court and 940 E. Second St. were snapped up by investors.
Greystar, a Charlestown, S.C.-based apartment behemoth armed with a $600 million private equity fund to buy rental assets around the country, purchased the 222-unit Roosevelt Lofts last year for $95 million and spent another $5 million to finish construction. The purchase came after the company became the manager of two other Downtown buildings, the Great Republic Lofts and Title Guarantee Lofts.
Roosevelt developer Milbank Real Estate only completed the first nine floors of the 16-level Financial District edifice before it went belly up. The property was in bankruptcy before Greystar stepped in.
“We looked at the Roosevelt and the risk had been taken away,” said Kevin Kaberna, managing director for investments with Greystar, which is looking for other purchase or development opportunities in Downtown. “We were like, wow, they’ve done almost all of the insides. All we had to do was really complete the interior and renovate the common areas.”
Denver-based Simpson Property Group followed suit when it paid $38.75 million for the nearby Brockman Lofts. That 80-unit Seventh Street project was nearly completed, then sat empty for three years before it fell victim to foreclosure. Simpson opened the building as apartments in June.
“As the large real estate companies are looking at how to deploy capital, they’re trying to go to areas that have growth potential and demonstrate revitalization or continued vital economics,” said Larry Miller, senior regional vice president of Simpson, which also owns the Security Lofts at Fifth and Spring streets. “Downtown Los Angeles certainly represents that.”
Today, the partially completed distressed properties like the Roosevelt and Brockman have been picked clean. That leaves well-capitalized investors with two primary places to park their money: in projects on land entitled before the downturn, or in already built and stable apartment complexes.
Massive real estate investment trusts like Essex Property Trust, which is valued at $5.6 billion, have been stocking up on Downtown rentals. Essex, which owns Belmont Station and Bunker Hill Towers, last year added the four-building Santee Court complex to its Downtown portfolio. Last year, LaSalle Investment Management paid $62.5 million for the City West apartment complex Canvas L.A.
One of the country’s largest apartment firms, Equity Residential, which is valued at $19.7 billion, now owns six Downtown buildings — the most recent acquisition came in April 2011 when it paid $100 million for the Pegasus Apartments. It also owns Mozaic, Hikari, Sakura Crossing, Glo and Artisan on Second, all of which were built in the last seven years. The firm is also building Chinatown Gateway.
Equity’s purchase of the Pegasus from the Kor Group, which developed the site in 2004, was significant in part because it was one of the first examples of an institutional investor acquiring an adaptive reuse complex Downtown, said broker Mark Tarczynski, executive vice president at Colliers.
“The community impact of having a large company like Equity as the owner is that the property is maintained in a better state,” Tarczynski said. “It is in the company’s best interest to keep that property maintained at or above acceptable market level because they want to derive as much money out of it as possible.”
If more institutional investors follow Equity into stabilized adaptive reuse buildings, however, it could spell major changes for retailers in neighborhoods defined by an emphasis on small independent businesses, like the Historic Core.
“Institutional money will not have the mercy to negotiate with little mom and pop grocery stores,” said Hamid Behdad, president of the Central City Development Group and the city’s former adaptive reuse czar. “They’re going to be brutal, totally capitalistic, and they prefer to give it to The Gap than mom and pop.”
Old Bank District developer Tom Gilmore, who owns three Historic Core apartment buildings near Fourth and Main streets, said interest from institutional owners would be a logical next step in the real estate cycle.
“I wouldn’t be surprised to see deals being made on fully occupied, fully functioning products like our own,” Gilmore said. “Mine’s not for sale and won’t be for some time, but projects like that, that are stable and still have an upside and are extremely low risk, are definitely going to be in play.”
Contact Ryan Vaillancourt at email@example.com.
©Los Angeles Downtown News.
The Entitled List
Securing government approvals to build can be lengthy and expensive, so real estate buyers with an eye toward development tend to prize land with entitlements in place. Most of the recent development activity in Downtown has involved land entitled before the economic downturn. In Downtown, there are several entitled parcels that have yet to be developed. Here is a partial list.
Metropolis: IDS Real Estate Group owns the 6.5-acre parcel just east of the 110 (Harbor) Freeway at Ninth and Francisco streets, where it has approvals to build a massive mixed-use project that would include hotel, residential, retail and office components. IDS still plans to develop the site.
1220 S. Figueroa St.: Parking lot king L&R Group bought this 2.7-acre parcel in month for $31 million. It is entitled for 648 condominiums and 822,000 square feet of retail space on the site. L&R is known as a land banker, not a developer.
Y-1: Originally planned as the third phase of the California Plaza office development, the grassy hill that rises at Fourth and Hill streets — where the CRA used to dispatch goats to munch the weeds — is entitled for an office tower. Currently a little park, it is owned by the now defunct CRA.
1050 S. Grand Ave.: Property owner Amir Kalantari is actively looking to sell this .6-acre plot which was entitled for a 22-story residential tower.
L.A. Central: Six years ago New York-based Moinian Group, announced plans to build 53- and 37-story towers housing 860 condominiums, plus 250,000 square feet of retail space, a grocery store, restaurants and a boutique hotel with 222 rooms on this plot on Figueroa Street at 11th Street, across from Staples Center. The status of the site remains uncertain.
Park Fifth: The parking lot at Fifth and Olive streets was entitled by developer David Houk for 732 residential units and 32,000-sqare feet of retail. The proposed project, which was never built, was known as Park Fifth.
Eighth and Garland: This 23,692-square-foot lot in City West is entitled for an 18-story, 64-unit condo tower. Property owner American Eastern Group is actively trying to sell it. It has been offered for $5.95 million.