Restaurants, bars and gentrification

Bisnow has an interesting article today about the ability of a few pioneering restaurants to “spur development in underserved neighborhoods”.

Now, before we dive in, we need to be clear that “underserved neighborhoods” are not empty places waiting for some new business to come in and put them on the map.

Generally speaking, these neighborhoods are full of normal people who have been living in them just fine for generations. To the extent that they’re “underserved”, it’s often due to long-term private and public disinvestment. And, to the extent that new restaurants introduce new people to those neighborhoods, there is the real possibility of kicking off cycles of gentrification, which often involves the displacement of some of those long-term residents.

All of that said, restaurants / bars do seem to have a unique power to attract new, affluent potential tenants to a neighborhood.

A salient example is Cafe Stella, which opened in Silver Lake in 1998.

Silver Lake, particularly the part to the north of Sunset, has had an artsy, interesting vibe at least since the 1920s. It has been an important center of gay life in LA since at least the 1960s (probably before). And there are tons of interesting, modernist houses dating to the 1950s and 1960s in the hills around Silver Lake reservoir, attesting to the (great) taste of at least some of its occupants.

But the Silver Lake that you probably know, the area around what became known as Sunset Junction, with the Farmer’s Market on Saturdays, Black Cat, Sawyer, Kettle Black, Pine & Crane, Night Market, etc., really didn’t didn’t exist before Cafe Stella opened.

Stella was the pioneer that showed what was possible for retail along Sunset in the neighborhood. And, as other entrepreneurs recognized what was possible, they followed Stella.

The cluster of interesting restaurants and bars has made the area along Sunset a wonderful, vibrant, walkable area… making the apartments around there much, much more valuable than they would otherwise have been and thereby creating a ton of value for property owners.

Can you think of some other neighborhoods in LA that await their own Stellas?

Restaurants and bars and Historic Filipinotown

At Adaptive, we’re 100% focused on multifamily.

But that doesn’t stop us from observing what’s going on with other asset classes in our little submarkets.

And, recently, I’ve become convinced that there is are opportunities for smaller, food and beverage-driven retail along both Temple and Beverly, south of the 101 in Historic Filipinotown.

Driven by the wave of new construction and the rehab / repositioning of older homes and apartment buildings, the population of relatively affluent residents in that area is increasing rapidly.

Currently, there are few bars / restaurants / performance venues that serve this new population – 1642, Crawfords, Tribal Cafe, Bootleg.

But I believe the neighborhood would support more, including both additional bars and more casual restaurants.

The downside to Temple and Beverly is that automobile-centered development overt the years has left both streets scarred by parking lots, making them less walkable than, say, Sunset in Sunset Junction or Echo Park.

But therein lies opportunity: There are plenty of larger, vacant commercial spaces that come with parking / room for outdoor space.

My guess is that there would be little community push-back, particularly if the proposed business(es) target a reasonable price point (think Red Lion, not Ostrich Farm).

We’re not the people to do this kind of thing, but the opportunities are DEFINITELY there.

The forecast on our latest deal

As the economy has continued to improve, both nationally and here in LA, it has become harder and harder to find deals worth doing.

That said, it’s definitely not impossible.

Today, we are closing on a deal with the following characteristics:

  • Currently a vacant triplex
  • Paying $220 / sq ft
  • Suitable for conversion into a 5 unit building

By the time we’re done, in around a year, inclusive of a fee to us for managing the project, am expecting the building will yield approximately 7.5% / year unlevered.

Assuming that rates for apartment loans are at 5% by then (they’re currently around 4.5%), I think we’ll be able to refinance out ~$1.6MM of the ~$1.7MM investment.

The cash-on-cash yield on the $100k remaining in the deal ought to be ~25% / year.

Depending on rent growth, etc., the investor should have 100% of his money back within 2-4 years of stabilization. Then there will be 2-3 years where he gets all of cashflow from the building to pay down the preferred return accrued during the construction process.

Thereafter, the investor and Adaptive will share in a (hopefully growing) cashflow forever.

Who says you can’t find good deals anymore?

Our latest 4plex renovation

Thought you guys might appreciate seeing pics of our most recently completed project, a very large 4plex which happens to be located next to another of our projects.

It’s obviously not the best time of year to be in lease-up, but the units are so special that I think they’ll go quickly.

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