And… Metro backed down

Per Curbed, Metro backed down on their misguided plan to build generic medical offices in Boyle Heights’ Mariachi Plaza.

However, whereas Curbed is presenting the change of plans as a win for anti-gentrification forces, I think the jury is still very much out.

Given that BH residents have been pretty happy to have affordable housing built in their neighborhood, I expect Metro will come back with a plan that pairs street-level retail with relatively dense housing upstairs.

Anti-gentrification activists are likely to demand that all of the housing be “affordable” (eg limited to residents making 80% or less of area median income as defined by the Census Bureau).

The most profitable plan would likely be to build market-rate housing. Given the proximity to the metro station, it’s likely the city would allow for a radical reduction in parking, which would allow the developer(s) to build a large number of units on a relatively small amount of land.

As with many things, the middle path will probably win-out. Metro will probably work with a developer to build mixed-income housing including both market-rate and affordable units.

That’s not a win for the gentrifiers or the anti-gentrifiers. It’s just a win for the neighborhood and the city, both of which require much more housing.

Here’s a dumb idea: Medical office in Mariachi Plaza

Per Curbed, Metro LA is considering building a giant retail / medical office plaza with a ton of parking in Mariachi Plaza in Boyle Heights.

Big bureaucracies come up with stupid urban planning ideas all the time, but this one is right up there.

Consider: Mariachi Plaza is a beautiful public space, well-served by public transportation, walking / biking distance from all the excitement going on downtown. In addition, it has a long and vibrant history as a center of latin culture, in general, and Chicano culture, in specific.

Have you ever seen a giant medical office complex?

Picture what Cedars has built along La Cienega in West Hollywood. They’re huge, impersonal, remote, generic, and cut off from street life. The people who work in- and patronize them very often drive, requiring massive amounts of garage space.

Building one of these beasts would be like dropping an alien mothership into the middle of Boyle Heights. It would destroy the street life that helps make the community so interesting, both to the people who are moving there AND to long-time residents.

What should be built there instead? Housing!

How about some mixed-income housing, with plenty of units set aside for very low, low and moderate income families but also plenty of market-rate units as well? How about, gasp, for sale affordable units, where working people can afford to become home-owners? How about taking advantage of the public transportation situation to reduce the parking requirements to one per unit?

And, at street level, how about some carefully curated retail… not just signing leases with the kind of credit tenants that banks love (Subway, CVS, etc.), but mixing in some actual community retail that fits with the area, like restaurants, bars, etc. And absolutely, 100% no check-cashing, liquor, etc… the kind of businesses that screw up so many of the commercial streets in Boyle Heights.

The redevelopment of a big parcel right in Mariachi Plaza is an opportunity to enhance what already makes that part of town wonderful. Let’s not go the other direction and cursh the neighborhood with a gigantic, generic, soul-less office complex.

Some thoughts on the New Year

Just getting back to the office after a wonderful break and thought I’d take the opportunity to offer some thoughts and make some predictions on the LA market in 2015.

Here they are, in no particular order:

1. Interest rates will rise, but prices won’t fall. Classic real estate finance math clearly shows that, all things being equal, increases in interest rates ought to lead to decreases in the price of income producing real estate. So, given that the Fed is sure to increase rates this year, you’d think that prices would fall. But they won’t because the economy is improving and people are more and more confident (and, therefore, risk accepting).

2. Rent growth will slow, particularly Downtown and in Hollywood and Glendale. All of these submarkets have absorbed a ton of product over the past year, with a lot more coming on-line in 2015. That will shift some power from landlords (who have dominated the market the last 2-3 years) back towards tenants.

3. LA will do something about AirBnB. It’s way too easy to clear out a big apartment building using the Ellis Act and then rent it on AirBnB like a hotel. There’s no way the city can allow people to operate big, unlicensed hotels. So, expect the city to step in with some regulation to limit the number of units that can be let on a short-term basis in one building.

4. The professionals will mostly cede the house-flipping business to amateurs (except at the high end). There’s no real embedded profit in any flip deal these days (eg the net exit price achievable for the post-renovation property on the day of entry does not exceed the cost of buying and renovating). The “investors” who are “making money” are really getting lucky, in that increases in the market price during the rehab period are bailing them out. These are bad deals and people should avoid them.

5. Condos will come roaring back. Condo deals have been out of favor since the bust, partially because people got burned on them and partially because the demand for yield in a low-interest rate environment led developers to build apartments instead. But the price per sq ft on single family homes in desirable areas is up enough to justify building condos, so people will build them.

At the end of the year, we’ll check back and see how I did. Meanwhile, I’m back in the saddle and ready to make A LOT of deals this year.

Stick around and hopefully we’ll all learn something together.

Why rents in Highland Park are rising so quickly

Obviously there is a bunch of controversy around the renovation of apartment buildings in Highland Park (“HLP”) by our company and others.

So far, the reporting on this topic has focused on the human aspect without really getting into the root economic / political issues driving gentrification in HLP.

To understand why rents are rising fast in HLP, you first need to understand that the neighborhood has become attractive to relatively affluent people over the past 5-10 years.

I’m not the right person to give you a comprehensive account of why the neighborhood is so much more attractive to people with money than it was previously… I’m far too uncool to patronize vintage furniture shops or high end fashion boutiques (though I do like a good bar). But any explanation needs to start with three factors:

  • Walkability – Both York and Figueroa, the key commercial streets in HLP, are walkable. People love this.
  • Public transportation – The gold line runs along Figueroa, so you can live in HLP and work downtown without driving. People love this, too.
  • Safety – The people who live in HLP have done a lot of work over the years to drive down the crime that used to make the neighborhood too scary for affluent potential homeowners / renters (oh, the irony).

Whatever the reason(s), HLP has become increasing popular with affluent people. So where are they going to live? Well, many of them have bought homes from flippers. And others have bought new small lot homes developed by both local and national development companies.

But what about affluent people who want to rent? What are the options for them?

To answer this question, we need to look at the neighborhood zoning. Check out this map from zimas.lacity.org:

zoning, Highland Park, HLP

 

 

 

 

 

 

 

 

The areas in yellow are all zoned R1, meaning that they are reserved for single family homes.

The areas in red and orange, mostly along York and Figueroa, are zoned for commercial (red) and various types of multifamily residential (orange).

At first glance, you might think that the solution to the question of where affluent tenants can live would be to build a bunch of new apartment buildings in the red and orange areas, right? That would increase supply at a time of increasing demand, meaning less upward pressure on rents.

But you can’t, and here’s why:

1. Along York Blvd, all of which is zoned commercial and therefore theoretically available for multifamily construction, there is a “Q” condition which says, among other things, “Whatever the zoning is on your lot, it will be treated as RD1.5 for the purposes of developing housing”. RD1.5 only lets you develop one housing unit (apartment) per 1,500 sq ft of lot, which means to build 10 units (for which you would need only 4,000-8,000 sq ft of land in other parts of the city), you need 15,000 sq ft. That amount of land generally costs too much to allow developers to make money from building rentals (for sale homes is, of course, another story).

2. Along Figueroa, all of the commercial and almost all of the multifamily land is included in a Historic Preservation Overlay Zone. The most important implication of this HPOZ is that you can not demolish any structure built before about 1965. So, the ordinary process of in-fill development, in which developers service increasing demand by, say, buying a four unit building, ripping it down, and replacing it with a 12 unit building, is difficult / impossible.

The result of the above is that developers effectively can not build enough new apartment buildings in HLP to provide housing to all of the people who want to move there.

So, if affluent renters move into the neighborhood, they displace current residents. This is where the story gets sadder and more complicated.

In most of LA, the vast majority of the apartment stock is protected by rent control, because it was built prior to 1978. Rent control isn’t perfect, but it does provide existing tenants a large measure of protection against being pushed out of their homes. With some exceptions, the only way tenants with below-market rents move out of rent controlled apartment buildings is via voluntary agreement (eg they get paid, often a very large amount of money).

But HLP is different from most of the city in one, crucial respect: Much of the apartment stock there is not covered by rent control.

Recall the HPOZ described above. The reason it was created in the first place was that, in the 1980s and 1990s, developers were ripping down old craftsmen homes to build big ugly apartment complexes (exactly what you would expect developers to do!). Because those complexes were built after 1978, they are not covered by rent control.

So, here’s the final explanation for what’s going on with rents / renovations HLP:

  • Affluent renters want to live there
  • Developers (like me) and our investors want to make money by serving this demand
  • There is no way to make money from the increased demand by building new apartment buildings because of the zoning and the HPOZ
  • So, developers can only service the demand by displacing tenants from existing buildings and renovating
  • Because the apartment stock in HLP includes a lot of non-rent control units, this displacement / renovation is happening faster and with lower pay-outs to the tenants than would be the case otherwise

What can be done to protect existing tenants?

  • You could change human nature so that investors stop wanting to get a return on their capital and/or people like me stop wanting to make money from helping them do so (this is not a serious proposal)
  • You could extend rent control to cover buildings built after 1978. State law presently makes this very difficult, but it’s possible. I think this would be bad public policy (for other reasons), but it would give existing tenants much more leverage vis-a-vis owners and, therefore, the ability to stay in their units or extract higher-payouts in exchange for leaving;
  • You could change the zoning to allow developers to build more buildings, which would involve, at a minimum, removing the Q condition on York and modifying the HPOZ (perhaps so that it covers only the truly exceptional buildings).

The last proposal is, of course, the one I favor, because it would allow developers to respond to increasing demand by increasing supply and thus stabilize rents.

(A final note: One common objection to the “increase supply” argument is that the new buildings would be built for affluent tenants, meaning that the new supply would not really relieve pressure on poor people. This argument is, in a word, hogwash. New supply is new supply… and, at any constant level of demand, new supply reduces prices.)