A Patron's Perspective On UCLA's Ziman Multi-family Housing Forecast Conference

Richard, this month, UCLA's Ziman Center is hosting a Multifamily Housing Forecast Conference. What are those attending likely to hear at this conference?

The number one topic will be about the housing crisis in Southern California and particularly Los Angeles and its environs. There's no doubt about it. The supply of single-family dwellings has increased. But, the number of single-and multi-family units has not increased as much as it should. Since 1992, the average annual deficiency in delivering new housing units in California is about 125,000. After a dozen years, we're down by one million to 1.5 million units. Even though there's been brisk construction in single-family development the last couple years, it has not made up the difference.

There are huge issues surrounding housing, because most of the infill properties are built-out or very difficult to expand, and with the exception of in and around downtown Los Angeles, it is difficult to find large enough unimproved properties prime for development or demolition and replacement. In addition to single-family development, mostly, what we are seeing built are condominiums and conversions of apartments to condominiums. And given the low interest rate environment, that probably will continue.

When there's a crisis, politicians typically shift into high gear and advance alternative and popular solutions. Which of the policy solutions now being debated makes the most sense to you? What's needed?

There needs to be more capital generated for family housing, especially low and moderate (affordable) housing. The most logical sources are the Federal, city and state governments. Affordable housing is in a crisis, and we need that type of product as fast as it can be produced. Infill development in and around downtown Los Angeles is prime area for development and there are little or no barriers to entry except cost and density. Mixed-use issues still appear to be a problem. But, we must remember the limits on our infrastructure of schools, water distribution and sewers still missing. In downtown LA, the schools are marginal. Health care facilities are inadequate. Everything else that the single professional or the childless couple needs is there. But, there's so much more needed downtown to create the total environment necessary to create a community for families.

In the suburbs, it's increasingly difficult. Densities are down, land costs are up, and municipal requirements are more difficult than ever. And, there's a lot of resistance by the homeowners for additional development. All of these types of issues have to be dealt with, or serious growth in suburban housing units, including affordable housing, will be severely limited.

Changing focus, state and local governments have been in fiscal deficit for years. So what are the practical prospects, whatever this multi-family housing conference produces in the way of good ideas, for public capital to be made available to assist the development of more housing in the State?

It's got to be creative capital. It has to be capital from new bonding sources that are tied to the income and taxation basis of the housing units created by the funds. In turn, that capital will attract multiple sources from the private sector. And, it must generate a decent return on investment to justify the development of new housing facilities.

You've been quoted in the past as saying "real estate extends far beyond its traditional focus on bricks and mortar it now reflects and is a major factor in the significant social and political issues of our time. Where we live, the quality of our future, personal, and business lives will be determined by the planning, design and development of our urban environment." Great thoughts, but public planning agencies today are stripped bare, and most of our interviewees suggest there's very little public planning going on. So, what are our prospects for building infill housing in concert with transportation planning to produce more livable communities?

A lot of this is dependent on the economy, namely local and state revenues. Probably at the state level, there is going to have to be a master-planning guru, for lack of better words, and then at each county level. We have 80 some cities in the county of Los Angeles alone. It's impossible to get anyone to agree on anything, because they have their own self vested interests.

Land is everything! Real estate's everywhere! It's freeways, it's the schools, hospitals, government facilities-they're all land. They're all real estate. Private homes, the multi-family housing we're talking about, office buildings-it's all about real estate.

People use real estate as a function in their life all day long. In order to connect the residential functions to the commercial functions, it is becoming more and more difficult. Transportation is a huge problem in Los Angeles County, and getting worse. And it's not dissimilar in San Francisco, Chicago, New York and Miami. It's a crisis that is ultimately going to disconnect and isolate our communities. We're seeing a tremendous amount of leasing and tenant activity in the San Fernando Valley, especially the west end of the San Fernando Valley. Why? People are finally giving up and refusing to travel the 405 Freeway, Sepulveda and the Canyons. So, instead of having offices in the Westside or in Beverly Hills, many of the tenants are choosing to stay closer to home by opening a satellite office or by moving their company's main office. You're going to see this type of movement throughout the county.

There is not much being done in the way of traffic and transportation planning. No additional freeways can be built because it's socially and culturally unacceptable. The subway probably won't be extended much more because of cost. Light rail lines have pretty much been exhausted, although we should have one to the Westside. But the problem is that you've got to go through so many cities just to accomplish that transportation goal. It's almost impossible to change without unanimous agreement.

Where is our system of one-way streets, coordinated traffic control and doing street repairs at low-travel hours?

At the Ziman Housing conference this month will be a Los Angeles City mayoral debate. What do you hope to hear from these candidates for mayor re housing policy?

This election is all about how they're going to direct the city and what their vision is for improving the quality of life here in Los Angeles. Los Angeles is a wonderful place to live, but as we all know, it has its issues. And the only way we're going to deal with these issues succinctly is to have a vision, a plan, and to begin to execute that plan. It doesn't just take four years or eight years-it's got to be a long term vision that begins to address these very serious issues. If we fail to adopt and implement their long term vision, Los Angeles is going to end up being a very unhappy place to live, notwithstanding the climate. We've got housing, transportation, environmental, education and many other issues - all long-term problems that require visionary leadership, and I know we will be hearing from the candidates on all of these most important issues.

Your answer sets up a series of questions about the issues which ought to be integral to any housing policy. But first, why aren't we hearing the candidates for President of the U.S. speaking more about the need for more housing?

Well, as John Kerry has said, $200 billion has been spent in Iraq and our federal deficit this fiscal year approaches one-half trillion dollars. The Federal government can't be a financial resource for all problems, and because of Iraq and the lack of adequate revenues all programs are being cut back in the healthcare, academic, cultural, environmental and housing social services. Educational cutbacks are unbelievable - preschool and after-school programs and school lunch program. Over 300 environmental programs have been cancelled or go unfunded because there just isn't the money available. You can't have a half-trillion dollar deficit year after year, continue to reduce taxes, and think that money is going to be forthcoming from the federal government for these types of programs, including those equally as important as transportation and housing.

Re transportation: Congress and the President have failed all this year to adopt a surface transportation re-authorization bill. Isn't federal infrastructure funding essential for garnering more housing entitlements from local governments?

The Federal government, as well as the state government, take such an enormous chunk of our tax dollars and our income and don't give it back pro rata, especially in Southern California, on a per capita basis. That's one of the complaints that both of our U.S. Senators and many of our members of Congress have made-that we're not getting our fair share of Federal funds here in California, and haven't in the last several years. Without these necessary funds, California will have to go it alone unless there is a dramatic change in direction of the administration.

You've been a loyal friend and supporter of LAUSD Superintendent Romer. The school district now has $12 billion to $14 billion of school bond money to spend on facilities in the next five years. But there's little evidence they're spending it to build joint-use, mixed-use neighborhood-centered schools. Might we better tap into those funds to realize some of the outcome objectives you just articulated?

The capital requirements of the educational system are tremendous. And we've been deficient throughout the state of California in producing new schools, new facilities, after school facilities, funding and endowing certain programs, and doing things that these bond funds are going to do. Hopefully it's going to be spent as rapidly as possible, and how can that tie into the housing issue? Perhaps we could have mixed-use projects, housing with schools? But, the zoning isn't there. And, many of the community homeowners will object to mixed-use. In New York, you have mixed-use schools and they function very well. You find the same in Chicago. But locally it's a long planning process and the schools' physical requirements are immediate.

Elaborate on the Ziman Center's objectives. Now three years old, how is this UCLA institution progressing towards realizing its vision and agenda?

The Ziman Center was established to bring together educational, academic, research, private enterprise and government to deal with and present potential resolutions to those serious issues confronting our communities today. It's not good enough just to do one thing or the other. Because so many of these issues are deeply intertwined and can't or shouldn't be dealt with separately, there has to come together a conceptual plan of how to deal with all aspects of the matters confronting us today and to utilize all aspects of real estate in the most efficient way to help solve these issues.

All services required in our communities will have to expand, and with not enough land available and with such barriers to entry, there has to be a forum within which all of the interested segments of the community can come together and begin to effectuate a vision, a plan to work out these differences. The Ziman Center strives to bring together the political aspects, private and public real estate interests, and academia to look at evolving community needs and make serious contributions toward fulfilling those needs.

We couldn't end this interview without you addressing some of Arden Realty's plans and challenges. What's the market opportunity for Arden Realty in Southern California today?

The heart of all commercial real estate is leasing, leasing, leasing. We're an office building company with 19 million square feet, over 200 buildings, with well over 3,000 tenants. Our current leased percentage is 91.5% to 92%. We would like to see it once again move up to an occupancy rate approaching 95%. It's fairly difficult to go higher than that because of turnover. But, today's market looks favorable and we are optimistic as we are seeing activity in almost all of our major submarkets in Southern California.

As I said earlier, we're seeing lots of activity in the San Fernando Valley; we're seeing activity on the Westside. We're even beginning to see a little bit of activity in El Segundo, one of the weakest submarkets in all of Los Angeles County. We're beginning to see rental rates move up in several submarkets, including Beverly Hills, the strongest submarket for Arden Realty in all of Los Angeles County, and probably in all of Southern California. Even though we are the largest, we only own six to seven percent of the entire inventory in Southern California. This produces a huge potential for external growth. Downtown San Diego also has been a tremendous market for Arden.

When we last interviewed you, you noted that Arden had no investments in downtown Los Angeles. Yet there's lots of housing being built and planned there. Has your mind changed since we last interviewed you? Or, is it still not a real estate market that attracts Arden Realty?

From a residential standpoint, downtown presents a unique opportunity because there are no little or barriers to entry and there are tremendous density opportunities. Right now, the problem for Arden Realty in downtown Los Angeles is that the commercial real estate prices have just gone sky high. If you look at a couple of the recent transactions, the going in capitalization rates are very, very low and the price per square foot is very high. We see a lot more bang for our buck in the suburban office market. That's not to say that if the right opportunities present themselves downtown that we wouldn't be interested.

There are some discussions about some major tenants moving downtown and consolidating because, quite frankly, there's nowhere else you can go if you are an exceptionally large tenant. If you're a 250,000 square foot user, where are you going to go, except, maybe, El Segundo? Even our Howard Hughes project is 97 or 98% leased and occupied. Downtown is a unique place and it's a different environment than the suburban world. But, best of luck of to everyone who is paying those very high prices.

You've talked about the need for civic and political leadership. The civic leadership in Southern California has radically changed over the last decade, as corporations have left or merged. Given our growth challenges, what are the prospects of our civic leadership coming together to partner with the private and public sector to guide this region in the years to come?

You're right about corporate America having abandoned Los Angeles. If you look at how many major banks used to be headquartered in downtown Los Angeles, they no longer exist. I believe the largest bank headquartered in Los Angeles County is City National Bank, with $12 to $15 billion in footings. A branch of Bank of America or Wells Fargo in Beverly Hills has on deposit that much money! The oil companies have all left. The major insurance companies have left downtown Los Angeles with some going to the suburbs or even leaving the state.

It's important to engender civic responsibility and civic involvement by all of corporate America. It's a tremendous source to accomplish, financially, many things. Quite honestly, I'm not so sure the Disney Hall, without the support of corporate sponsors, would have been completed. Many of the local companies did stand up. Eli Broad did an enormous, and he's an example of a great civic leader. Every city needs civic visionaries who will assume the mantle of leadership to address all of the current and future challenges.