As downtown grows, the big-money developers rush in news gas variables pogil extension questions


Consider some of the biggest recent developments: The sites of Figueroa Central and Metropolis, two mixed-use mega-projects near L.A. Live, were bought late last year by Beijing-based Oceanwide Real Estate Group and Shanghai-based Greenland Group, respectively. The $1 billion Wilshire Grand tower comes from South Korean conglomerate Hanjin International. Singapore-based Overseas Union Enterprise bought U.S. Bank Tower last year.

While the Asian buying spree gets many of the headlines, developers from around the United States, including from New York, Chicago, Houston, Atlanta and Cleveland, are looking to cash in on Downtown. Even large Los Angeles-based developers such as Evoq Properties have been backed by out-of-town institutional funds from New York and elsewhere, said Evoq CEO Martin Caverly.

“Downtown L.A. was not a favored place for big institutional funding,” Caverly said. “Now it is. This isn’t flash-in-the-pan stuff, either. When you have these players making these kinds of bets, it’s because they see long-term, sustainable success.”

The biggest beyond-L.A. investment is anchored in housing. More than 5,000 apartments are being built in Downtown, and more than 3,000 additional units have been approved by the city, according to real estate sales and research firm Polaris Pacific.

Vancouver-based Onni Group has broken ground or submitted plans for more than 1,000 units throughout Downtown, all in mid- and high-rise structures. Carmel Partners is deep into construction on a low-rise 700-apartment building with a Whole Foods market at Eighth Street and Grand Avenue, and the San Francisco-based developer recently revealed plans for a 27-story, 363-unit tower nearby at Eighth and Olive streets. New York-based Related Cos. is constructing a 19-story apartment building on Bunker Hill adjacent to the upcoming Broad museum, and is aiming for a 2015 groundbreaking on the recently revived, $650 million, Frank Gehry-designed mixed-use project The Grand across the street from Walt Disney Concert Hall.

Experts say that these developers are not being speculative or over-optimistic about the demand for new housing. Many ambitious residential projects were downgraded or cut altogether during the recession, and that sense of caution still lingers with lenders — partly why so few condominiums are being built despite the overall boom, according to Thomas Bohlinger, an executive vice president at brokerage firm CBRE.

Still, the last two years have ushered in a renewed sense of confidence for builders and lenders, and the Downtown boom correlates to both rising rents and costs of home ownership in the city, said Richard Green, director of the University of Southern California’s Lusk Center for Real Estate.

“We have some of the lowest vacancy rates in the country, and Downtown has a lot of parking lots to build on,” Green said. “On the Westside, prices per square foot are very high, which is partly why the attention has shifted. But it’s all a function of the L.A. market improving fundamentally.”

Some locals are still engaged in next wave investment. Sonny Astani is active in South Park and Historic Core pioneer Izek Shomof has plans for several more Downtown projects. Still, experts say, many beyond-L.A. investors have a bird’s-eye view that locals lack.

“When you see the foreign investment and institutional investment, a lot of it is because those folks are seeing [Downtown] in the greater context of a world-class city,” Bohlinger said. “If you’re in Beijing or Germany or New York, it’s easier to see the dramatic change. A lot of people in L.A. are stuck in thinking about Downtown of the ’90s and ’80s.”

The feeling extends to office space. Despite a soft market (the vacancy rate in Class A Downtown buildings is 19.4%, according to brokerage Colliers International), Singapore-based Overseas Union Enterprise bought the tallest building in Los Angeles, U.S. Bank Tower, from troubled local office giant MPG Office Trust in June for $367.5 million.

New York-based Brookfield Properties picked up four more Downtown office properties from MPG in October for around $430 million. That has given Brookfield control of seven of Downtown’s most significant skyscrapers, including the Gas Company Tower and Wells Fargo Tower.

Meanwhile, Downtown-based Thomas Properties Group was purchased late last year by the Florida real estate investment trust Parkway Properties. That deal resulted in the liquidation of Thomas Properties’ share of City National Plaza, which it had co-owned with the California State Teachers’ Retirement System. The Financial District complex has since been acquired by the California Public Employees Retirement System.

The last time Downtown saw purchases on this scale was in the late 1980s, when Japanese real estate investors, buoyed by the yen and loose lending standards in Japan, started snagging key properties across the United States. That was undone by the Japanese stock market crash of the early ’90s. Coupled with slow growth in U.S. markets, it spelled disaster for investors and their assets, which plummeted in value.

Experts say today’s investments lack the same speculative risk attached to the Japanese buying spree because of a combination of more sophisticated analysis data and the fact that, unlike previous foreign investors, buyers are now looking to contribute to Downtown, rather than just lock up assets for financial security.

“What happened in the past was buyers were just trading capital for buildings without much development, and no economic growth comes from that,” CBRE’s Bohlinger said. “But you’re now seeing money to create new product or renovate products to satisfy the needs of the community. It’s a different philosophy.”

That so many Asian investors, in particular, are considering Los Angeles may also have to do with the cultural or familial ties they have in the city, especially in terms of the large Chinese and Korean communities near Downtown. The upside is that international investment often brings new international tenants, which is critical in expanding Downtown into a global gateway, Evoq’s Caverly said.

Of course, plenty of concerns remain about Downtown’s development future, and optimistic investments have failed in the past. Many of the experts’ concerns, however, focus on how the growth will happen and what it might mean for the community, rather than the fact that money is trading hands on a great scale.

USC’s Green, for instance, said that inclusiveness, or the lack thereof, is a huge issue considering that many developments are aimed at wealthier tenants. Bohlinger said his biggest concern is that parts of Downtown will become cold and lifeless if too many high-rises go up. Cushman & Wakefield’s Renard believes that building schools and creating a lively small-business base will prove critical.

Key Project: Wilshire Grand replacement, a $1 billion, 73-story tower at Seventh and Figueroa streets that will be the tallest building west of the Mississippi River when completed. It will have 400,000 square feet of office space and 900 hotel rooms.