Forest City's Greg Vilkin Opines On Downtown Los Angeles' Development Potential

Greg, Forest City owns and develops property around the nation. What today entices you and others to invest so heavily in housing in downtown Los Angeles? Clearly, a decade ago few were interested, so why now?

Well, we are no strangers to Downtown. We have been developing here since 1968 and have completed over 2,200 housing units in Downtown and over 8,500 in Los Angeles County. The opportunity is not only in Downtown Los Angeles. We see two large, historic demographic waves happening that are causing a need for higher-density urban housing in downtowns across the country. Over the next fifteen years, both of these waves will crash simultaneously, and they are not suburban waves. Firstly, the Baby Boomers are becoming "empty nesters," even as their children are moving out on their own and need housing as they enter the workforce. It is a huge dynamic. If you look at what happened when the Baby Boomers moved out to the suburbs and bought houses because they were having children, the same dynamic is now causing urban housing to become very popular from the standpoint of market acceptance.

The second major demographic change we are seeing is motivated by traffic. It does not just exist here in Los Angeles, but it is exacerbated here. A new study just came out that said that Angelenos waste ninety hours per year per adult in traffic – the highest in the country. You can look at it as if you are taking your two-week vacation and adding another two and a half days on it, just because of how much time you spend sitting on the freeways of L.A., and that is only going to get worse. People are saying, "I don't want to be an hour and a half away from whereever I have to go, even if I don't work in Downtown."

Forest City is working on three residential projects in Downtown L.A.: 1100 Wilshire, Metro 417 (in the Subway Terminal Building), and the Met Lofts. Please elaborate on those projects and on what will make them attractive to potential residents.

Thank you for mentioning them. We have three different opportunities that we picked very carefully. They are all opening in the spring of 2005, so we will be at the leading edge of Downtown housing. I'll start will Met Lofts, which is the first new loft-style project built in Downtown. It will have 264 rental units in an eight-story concrete and glass building. We did this project in partnership with CRA/LA, and 20 percent of the units will be affordable housing, while the other 80 percent will be market-rate housing. It is what we've termed a soft loft: built new, looks old.

Our second project is Metro 417 at the Subway Terminal Building, which is not a loft at all – it is a wonderful old office building. That project will include 274 historic apartments and close to 100,000 sq. ft. of retail on the lower floors. They are fully appointed apartments with enclosed bedrooms and two baths, so it is not the open loft feel, but a luxury apartment in a historic building with a modern style.

Our third offering is our first condominium offering in about 15 years in Los Angeles, the 1100 Wilshire building. This was a 1986 office building that was built but never occupied on the west side of the Harbor Freeway. Everybody in Los Angeles has seen that building, it has become an icon, and we are going to convert that building into 230 loft-style condos with unbelievable views. The building has an unobstructed 360-degree view because the zoning on that side of the freeway in the Center City Plan and under Proposition U only allows new buildings to go to 17 stories. In the unique configuration of this building, the first livable floor is the 17th, and below that is a parking structure. So, it is a 37-story building with 21 floors of complete unobstructed views. We are also putting a unique "sky deck" on the 17th floor, which will have a lap pool and an outdoor club and bar.

Forest City's L.A. product is mostly rental units. Please address both the challenge of constructing condominiums in this market and why market demand hasn't resulted in more home-ownership developments.

Well, California is unique when it comes to ownership because it enforces 10-year strict liability on construction defects. No other state has that, and it makes it very difficult and very costly to get insurance. Our typical insurance costs are running $20,000-25,000 per unit. And in California, you don't ask whether you will be sued, you assume that you will be sued and ask how to defend it. The law in California, in my opinion, is very counterproductive to the creation of housing and the creation of affordable housing because plaintiffs do not have to prove any damage or that there is a problem, but only that it was not built exactly according to plan. So, there is a whole set of lawyers who do nothing but buy condominiums and then take contingency cases and sue developers. It is very counterproductive from a public policy standpoint. We finished selling our last condo building out in the early 1980s, and we finished the lawsuit on it in the mid-1990s. It has been axiomatic that if you build something, ten years later you will be sued.

So, what convinced Forest City to build the 1100 Wilshire project, and is it a precedent for what is likely to be offered in the near future?

I think so. We are actually looking at a couple of buildings to do as condominiums, because apartment rents have not kept pace with the opportunity costs of condominiums. As the real estate market has continued to escalate, people have been willing to pay more for ownership, because they feel their units are just going to go higher and higher. It costs about the same to build condominiums as apartments. In Downtown Los Angeles, it would cost you $250,000 or $260,000 to create an apartment. You will add another $10,000 a unit for condominium finishes, but that condo will now sell for $450,000-500,000.

In our October 2004 interview with the developers of 1111 South Park in Downtown Los Angeles, they suggested that housing prices will rise to more than $500 per square foot. Do you agree with their prediction for the Downtown market?

Yes, land pricing in Downtown Los Angeles has gone from $75 dollars per square foot with no takers three years ago, to the latest sales, which are $300 to $320 per square foot of land, while condominiums during the same period have gone from $190 per square foot to an average of $450 per square foot and climbing. There was a large gap from other areas because Downtown Los Angeles was not a desirable neighborhood. Clearly, that is changing, and I think that Downtown Los Angeles will be as desirable a neighborhood as any of the other nearby locations.

Greg, how will the downtown Los Angeles housing market evolve? What, if anything, is going to distinguish the many neighborhoods within Downtown?

I think that there will be five primary neighborhoods: Chinatown, Little Tokyo, the Historic Core, South Park, and Central City West. I think all of them will be very active neighborhoods with their own neighborhood centers, but they will have different characteristics. South Park will be characterized by a series of new buildings, because that is where land is available. The Historic Core will have very few new buildings; some of the parking lots will be developed, but the historic buildings will primarily create its identity. Little Tokyo will have a mix of converted warehouses and new buildings, and Chinatown will also have a mix of converted warehouses and new buildings. In Central City West, you will see new office buildings that are being converted and some ground-up development, as you have already seen with the Medici.

What additional infrastructure will be needed in Downtown to support present and future growth?

That is going to be a challenge in that we are again feeling the negatives of the gutting of the CRA program in Downtown. Had CRA been successful in completing the new project area, they would have been able to go and buy most of South Park. They were working on a master plan in South Park that allowed them to include an elementary school site, a high school site, and five or six pocket parks and connections between them. They would have generated enough money from tax increments to put in those public infrastructure improvements; without them, it will become a less livable neighborhood.

Look at what has made Portland so successful and so livable. The Portland Development Commission is one agency that has redevelopment power and also runs transit, planning, and economic development. They look at Portland as a whole, not as a bunch of different pieces, and the five council members are elected at large. It is a very different model from here. In Downtown Los Angeles, you won't see the same kinds of neighborhoods that you see in Portland, with 200 by 200 blocks, and every third block has parks on it. Again, without the participation of CRA, there is no ability to pay for those improvements.

Lastly, you note that retail will have to evolve once there is critical mass in Downtown. What is the twenty-first-century model for urban infill retail in America? Is Downtown L.A. ripe for such retail development?

Forest City is the largest retail developer and a pioneer in New York City, where we brought Home Depot, Toys'R'Us, and Target into urban locations. What we have found is that if you don't provide a local place to shop to urban residents, they just drive further out, so that tax dollars are lost to other municipalities. Now we are seeing Costco and other big-box stores going to multi-story formats. The Home Depot store that we opened in Brooklyn actually delivers all of the products to customers' homes. There are a lot of models for urban America.

There is a tremendous amount of retail already in Downtown L.A., especially specialty retail, with the Garment District and Jewelry District. Those are things that you are not going to duplicate.

But, traditional retailers like Gap and Old Navy will only come when there are more people living down here. We are right now building a large urban-format center in Downtown San Francisco in partnership with Westfield, where we are opening a Bloomingdale's and another 1.2 million square feet mixed-use retail with office on Market Street. Downtown Los Angeles will eventually get to that place. Will it get that sort of major retail like Downtown San Francisco? Probably not, because there are too many other options in Los Angeles. But, are you going to have active streetfront retail? Absolutely.