Downtown Gentrification and Its Discontents

The flood of investment into the Downtown Los Angeles market is slowly producing a world class, 24 hour city. Already a sports and cultural powerhouse with the Staples Center and Walt Disney Concert Hall (above), the influx of new loft dwellers is finally drawing essentials like a Ralphs supermarket slated to open later this year.

The Walsh Team is at the forefront of the area's explosive growth with two new downtown listings: 1) Artist's Lofts at 900 E 1st St, an industrial adaptive reuse with wood floors, exposed brick, and killer views of the downtown skyline (currently under contract); and 2) The Oviatt SRO Apartments at 1315 S Flower in the heart of the exciting developments in downtown's South Park district. It's flanked by the Convention Center and a Blue Line Metro stop and contiguous with Legacy Partners beautiful new 100-unit luxury building City Lights on Fig. You'll see from the photographs that the owners have adopted a similar paint job to blend their 1911 brick building in with the 2003 wood frame and stucco. The Oviatt has been dramatically renovated with a new lobby and leasing office, fresh carpet, mailboxes, and new windows on the sides facing Pico and Flower, but still has lots upside with more improvements. There's also vacant retail spaces on the bottom floor, valuable assets for a retail-lean market that's adding so many new households.

Five years ago, it would have been unthinkable to renovate these older single room occupancy hotels with shared baths and tiny rooms, but the market forces are unstoppable. That doesn't mean everyone's happy about the trend. SRO buildings in other parts of downtown like Skid Row have always been the housing choice of last resort for the poor and homeless. According to a recent Los Angeles Business journal article, homeless advocates aren't too happy to see developments like this:

For decades, the Cecil, at 640 S. Main St., was among dozens of run-down single room occupancy hotels on Skid Row that rented rooms without kitchens or private bathrooms for between $150 and $200 per week.

But Street Wise Investments LLC, owner of the 634-room Cecil, has made nearly $4 million in improvements since it bought the hotel in 1999....Gone are the advertisements for $150 weekly room rates. In their place are efforts to lure budget domestic travelers and European and Asian backpackers.

Many of the SRO hotels are owned by non-profit groups like Skid Row Housing Trust, which buys small hotels to preserve as affordable housing, but that leaves 4,000 privately owned units near Skid Row, which worries the Trust's executive director Jim Bonar:

With limited affordable housing in the city, gentrification is threatening one of the few options [left for low-income tenants]. "I'm afraid the handwriting is on the wall," he said. "At this point it's only a matter of time."

Looks like he's right:

Gilmore & Associates LLC, a pioneer in downtown loft conversions, has purchased a condemned SRO called the El Dorado at 416 S. Spring St., where it plans another market-rate condo project.

Limiting development problem either, since the major cause of homelessness is the growing gap between wages and housing costs. And the major cause of skyrocketing housing prices (besides ultra-low interest rates from Greenspan) is lack of supply due to backward land use regulations and NIMBYism. A Heartland Institute Study found the implicit zoning tax on a buildable quarter acre plot of land is $303,178. No wonder it's so expensive to live in LA!

Downtown Los Angeles is one of the last available areas where significant new housing resources can be built. Along with efforts to provide education and health care to those on the margins of society, we need to let the market develop enough new housing that everyone can afford a place to live.

For more about the exciting story of downtown see the LA Downtown News, an excellent resource about downtown development and the Central City Association. For more about homelessness in LA, check out Beyond Shelter and the Los Angeles Homeless Services Authority.

Squeaky Clean Institutional Real Estate Companies

The barrage of corporate scandals over the last several years has sapped confidence in our proud securities markets. Driven to inflate results (and executives' fat stock option packages) large firms like Enron and WorldCom used dubious accounting methods, questionable foreign tax havens, and bogus underwriting from Wall Street's largest investment banks to bilk thousands of naive investors. But according to a new article from Knowledge @ Wharton, Real Estate Investment Trusts have been model corporate citizens:

Unlike the boom of the 1980s, whose aftermath revealed a host of shady deals between real estate developers and unscrupulous S&L executives, publicly traded REITs have largely been untouched by the most recent scandals.

So how did they do it? The article gives three reasons:

One is the necessity to create cleaner companies after the 1989-92 recession that played havoc with the real estate industry. "There is no question that real estate had a horrendous reputation in the public markets," [Sam Zell, Equity Group Investments of Chicago] said of the pre-1990s era. "But come 1992, the shoe was on the other foot. We were desperate. We had to raise money or our industry was gone."

Zell noted the second reason is that "the nature of our business doesn't lend itself to quite the same amount of Mickey Mouse" as in many other companies. It is hard for REITs to cook their books when they pay out 90% or more of their cash flow as dividends. (REITs are exempt from federal tax so long as they distribute at least 90% of taxable income to investors each year.) The third reason is the level of ownership by management. "No segment of the S&P 500 has a higher concentration of ownership by management than the REITs do," said Zell.

Looks like the rest of Corporate America could learn something from the big REITs. Though not practical for all firms higher dividend payouts keep companies honest by discouraging them from using the tax line as a profit center. Guess Bush and friends knew what they were doing with the dividend tax cuts -- better to have the owners watching the money than the managers.

Welcome to The Walsh Team Blog

Welcome to The Walsh Team Blog, a place for us to provide you timely content about how trends in the global real estate market and new technologies are remaking our businesses and creating endless opportunities. We've always strived to provide our clients excellent advisory, marketing and transaction services. With this blog we hope to provide knowledge that will always keep you ahead of the curve by identifying value before your competitors. Feel free to add your expert voices to the mix in the comments sections -- we appreciate productive conversations and closer relationships those bring. Enjoy!