10.13.2017

“We are not going to build anywhere in LA for at least two years”

The Real Deal, October 13, 2017

Development costs have skyrocketed in Los Angeles in recent years, as construction and land prices rise in a region notorious for land use challenges.

A group of prominent developers, gathered Thursday at the California Club for an LAHQ panel, said Measure JJJ will only compound the impacts of the construction labor shortage. The voter-approved law requires developers to pay construction workers prevailing wages and set aside a percentage of units in residential projects for low income households.

“We have seen (construction) costs rise in the last few months alone,” said Neils Cotter, a partner at Carmel Partners.

The development arm of the equity firm — which recently opened the luxe Atelier apartments across the street from its Whole Foods-anchored Eighth & Grand project Downtown — has seen costs rise a whopping 50 percent since 2013, Cotter said.

While Cotter had an optimistic outlook on Downtown’s potential, another developer on the panel, which was moderated by Bradley Cox of Trammell Crow, had harsher words about the development climate in L.A.

“We are not going to build anywhere in L.A. for at least two years,” said Paul Keller, the CEO of Mack Urban, which is building the second phase of a $1.2 billion development with AECOM Capital in South Park.

He said the land and the labor are simply too expensive.

“Unless subcontractors start yielding and landowners start yielding,” he said. “Something has got to give.”

On the subject of DTLA’s revitalization, Keller said the area still lacks a high-level office tenant — of the magnitude that would drive people into the area.

The problem with Downtown Los Angeles is that we don’t have an Amazon,” he said. “You can’t gentrify Downtown on the backs of multifamily developers. You are going to see things slow down [until such a tenant arrives].”

David Binswanger, who heads the West Coast at Lincoln Property Company, said that while ground-up development Downtown is a challenge to pencil, “there isn’t a greater value than buying an existing office building at 50 percent of the replacement cost.”

Binswanger guessed that the real estate cycle is “closer to the end” than the beginning, but that demand in some areas, like original online programming from the likes of Amazon and Netflix, remains strong enough to warrant development risks. Netflix’ content wing recently leased a large swath of space in Hollywood, for example, while Apple is bulking up its original content arm, and is said to be in talks to lease two properties in West L.A. and Culver City for production.

“I’m optimistic that this is the beginning, not the end [of the original content boom],” Binswanger said. “Los Angeles is the epicenter of it.”

 

By Hannah Miet