ULI-LA’s Emerging Trends
Historic Urban Transformation
of LA’s Downtown

03.01.2016

ULI-LA’s Emerging Trends in Real Estate 2016: Historic Urban Transformation of LA’s Downtown

The Planning Report, February 25, 2016

To explore the transformation of Downtown LA and continuing caution of lenders, TPR presents excerpts from ULI-LA’ s Emerging Trends in Real Estate 2016. The panel features David Sonnenblick, principal at Sonnenblick-Eichner Company, David Binswanger, executive vice president at Lincoln Property Company; Wayne Brandt, managing director at Wells Fargo Bank; Marcia Diaz, managing director at Prudential; and Mary Ann King, president and managing partner at Moran & Company.

David Binswanger
David Binswanger

David Binswanger: I was having a conversation with some people in the real estate business, and we think that Downtown has the greatest potential for urban transformation of any large city in the United States. We believe that because of psychology.

15 years ago, Staples Center was built in the middle of nowhere, on the south end of Downtown, away from all the activity on Bunker Hill. That mattered because, for the first time since probably ‘91 or ‘92, an executive or a business decision-maker living in Brentwood, the Palisades, or La Cañada had a reason to come downtown. That person would come down, watch a Laker game, jump in the car, and drive away as fast as possible.

Fast-forward 10 years to five years ago. That same person would come downtown and watch a Laker game, but they heard about some new restaurant. Now, they leave the Laker game, go to a new restaurant, then they jump in their car and drive away as fast as possible.

Today, that same person comes downtown, they now go to a Clipper game instead, they go to their favorite restaurant, and go to a bar after. Then they jump into an Uber and go back home.

What happens tomorrow? All those same things, except that when they’re walking around, it dawns on them: My customers and my employees are all down here.

The wall that surrounded Downtown for 25 years has been broken down. There was this bubble that wouldn’t let anything out, and it wouldn’t let anything else from the rest of Los Angeles in.

How did that happen? $25 billion of investment in the last 15 years in Downtown. There are rooms downtown that could be housing, that could be condos, and that could be hotel rooms. There’s transportation. There’s entertainment and retail.

Let’s talk about transportation. $3.2 billion invested in Downtown. The Regional Connector and the Expo Line are right around the corner.

Bigger game-changers than that? Uber. People are in a fragmented urban center today, with different neighborhoods: Chinatown, Arts District, Financial Core, Bank. Even if you lived in Downtown five years ago, you still needed a car. That’s not very urban. Today, you don’t. You push Uber and you can connect to all these different locations.

Next, let’s talk about retail. Olden-days retail was big box—Nordstrom’s, junior anchor—Best Buy, inline space, maybe a grocery store. At best, an outdoor mall in California. No longer. Today, retailers want to be authentic. They want to be exploratory. Millennials, in particular, want to create connectivity. Where do they connect? They connect at food: coffee, brunches, and dinners.

The best chefs in LA are coming downtown to open restaurants. They’re occupying the ground floors of what had been previously vacant—retail, beneath office, beneath residential. That’s creating the fabric and neighborhoods. It’s a much bigger game-changer, in my opinion, than the national firms that are now coming in—maybe with the exception of Whole Foods.

Let’s talk about hotels. 45 million people visited LA last year. 23 million, which is an all-time record, stayed overnight one night. Where was the biggest foreign travel destination to LA? China, at number one two years in a row, and predicted to be for a third year.

Where are they coming? Mostly to our urban center. It’s familiar to them. There are big brands and names selling residential in China and helping promote Downtown Los Angeles. Coupled that with the Convention Center revitalization: 2,500 hotel rooms under construction and 2,500 more in the pipeline. That’ll move the Convention Center business from number 14 in the country easily into the top 10 and benefit directly hotel, residential, retail, with other ancillary benefits.

The $25 billion invested and the psychological breakthrough—with all Angelenos and beyond now supporting our fabric—have given Downtown this potential to be the greatest urban transformation in the US.

David Sonnenblick: Touch upon the change in office tenants, and the type of spaces that cater to these tenants. For those that decided to take a space downtown, what was the attractiveness?

David Binswanger: There are a lot of different product types downtown. Office is the lagger, statistically. I don’t think it’s the truth yet that tenants in preferred locations like Hollywood, Beverly Hills, Culver City, Santa Monica or Playa Vista would make a choice to be Downtown if they had available product at a relatively affordable rate in one of those other markets.

But like my psychological example, the walls have been broken down. It’s not so dissimilar from Hollywood: 10 years ago all the residential went in, now the retail’s built up, and now Hollywood’s probably the hottest market in LA. We’ve done 2 million square feet of net absorption in the last year—all new development. It’s been leased before it’s been finished. That’s what I predict for Downtown. As residents retailers, and entertainment comes in office will be the last to benefit.

But there’s clearly already been a trickle. Gensler’s move was prophetic. They were very quick to come down here and see the advantage in the space. It’s an amazing selling tool for their business. I think more and more architecture firms have woken up and said, “I need to be a part of that.”

Downtown now has the most cutting-edge tenants. The tenants that moved out of Santa Monica into Culver City during the last run-up are now being pressed out of Culver City, and they’re coming, kicking tires, usually in the most interesting product—Rising’s building, the Ford Factory building, The Desmond. They’re not yet looking at Gas Company Tower. But they probably will over time.

David Sonnenblick: Mary Ann, tell us why people want to be downtown in this urban core, and the type of people that we’re seeing living here.

Mary Ann King: All of us living or working in this city in this decade are going to remember this as a Golden Age in terms of our development.