Kevin Ratner Confirms Forest City's Interest in Metropolitan L.A.

Forest City, a public company, reportedly made over a billion dollars last year – a very successful year – developing throughout the country. Your mission statement says that Forest City only works in robust real estate markets. What makes the L.A. market robust and a good opportunity for Forest City?

We started developing in Los Angeles back in the 1960s. My cousin Albert Ratner predicted then that downtown L.A. would take off. He says he was only 30 years too early!

We've seen downtown go through many cycles. We were here in the 1970s and in the 1980s, but through the 1990s we didn't really do anything in L.A. It was a difficult place to operate for real estate developers because of the peculiarities of the city. But then in the late ‘90s we started to see things happening here. Some people moved back into downtown, housing prices were starting to escalate, and we had some real opportunities to do some deals downtown.

When we start to see little things happening, we like to get into the market very early and use our dollars to change the community and change the market. An example of that is the Embarcadero in San Francisco. We built a project called Bayside Village in the early '90s when there was nothing there. It took five or six years before anything else showed up there. That was opportunistic because now it's a phenomenal success.

Our '80s project in L.A., the Metropolitan, was built when there was nothing down here. It took a little longer for other projects to get here, but now South Park has become a really robust market. We're here and we're well entrenched. We can go many places in the country – we operate in 22 states plus the District of Columbia. But Southern California – and particularly Los Angeles, the second-biggest city in the country – is obviously the place to be if we find the right opportunities.

Elaborate on the pros and cons of the L.A. real estate development environment in the '90s and how the variables have improved to support and promote dense, residential growth today.

Los Angeles, particularly in downtown, remains difficult. It's Fire Zone 1, so you have to build Type 3 Modified or Type 1, so that immediately adds to construction costs. You have to go high-density. For instance, we had originally planned to build the Metropolitan out of wood, but we couldn't. Market conditions back then meant we were forced to turn to the CRA for financial assistance to make the project feasible. Adding to the challenges is that in Los Angeles there basically is no "by-right" development. To build anything over 49 units you have to do a site plan review, and you have to talk to the CRA if it's in a CRA zone. Then there are prevailing wage issues. There are good intentions behind all these obstacles, but together they mean that it continues to be difficult to build housing. The Adaptive Reuse Ordinance was a great step in the right direction – more than 3,000 units have come out of that. If more is done to reduce the obstacles, we will see more needed housing.

It is currently rumored in the development community that as many as 48 high-rises are going through plan check or being considered for Los Angeles. That's a startling number for those with experience in real estate in the city for the past fifty years. It wasn't that long ago that City Hall was, by regulation, the tallest building in the city. How realistic is that 48 number?

It's hard for me to say. There's a huge housing shortage in Los Angeles, so I think more housing is a good thing. But some of those proposals are counting on such high sales prices that it is going to be hard at the end of the day for them all to pencil out.

When TPR last interviewed the South Group re their housing development in downtown, they were in for under $300 per square foot and hoping that they had bet right on the market. Less than a year later – what's the square footage cost for development today, and what's the market able to bear?

The latest number I heard is around $575-$600 per square foot down there. It would be very hard for me to take a bet at $600 a square foot to build a 20-odd-story condo building. I'd need probably $750 - $800 a foot to make that work. That's at the top of the market, well above what I'm getting at 1100 Wilshire. I can't tell you how other people do their pro formas, but at those land prices, I can't make high-end condos work, and I certainly can't make apartments work.

Your answer is a great segue to the question: what amenities add value to housing downtown? In Manhattan, new condo's sell for $1200 a square foot; in Brooklyn Heights they are discounted to $900 a square foot. These are markets with vibrant street life, as well as business and cultural energy. You don't have a like, built or social environment in downtown L.A. today. What must happen to make LA's downtown ripe for high-end residential development?

I think you must have a mix of uses. You have to have businesses and jobs located here. You have to have culture and entertainment around it. You have to have the amenities so you don't have to drive to go to the grocery store or the dry cleaner. You want to be able to walk to dinner and to visit your friends. What really makes a vibrant place is a pedestrian-oriented city that is, in a lot of ways, self-encased so that you have everything you need. Within downtown you should be able to have a vibrant life within the boundaries of downtown and not have to get into your car. That's what gives people that connection and community feeling that people ultimately want.

You have a lot of your L.A. assets in the South Park area of downtown. Why, and what amenities are still needed to support these projects?

There's already a fair amount of housing, but over the next two to five years a lot of new housing will be coming on line, both apartments and condos. I've heard about up to 11 towers in South Park, which is a subset of the 49 you mentioned before. L.A. Live is going to provide a lot of entertainment opportunities. A lot of vibrancy, a lot of restaurants, a lot of ancillary attractions are going to draw in people from outside the city and will be an amenity for people who live here. The grocery store is about to open, and that will certainly create a neighborhood. Having a place to walk to and grab your groceries is going to be instrumental in creating that "tipping point" for South Park. Grand Avenue is the other end of the barbell, and there you have lots of culture, and there's going to be lots of housing, lots of other entertainment amenities, plus the civic center. In terms of employment, I think it is the largest outside of Washington, D.C. They're all close enough to each other that they can feed off each other and be used by the population that lives downtown.

As a Ratner, a member of a multi-generational family that started and manage Forest City, share with our readers how you sell and defend Los Angeles market opportunities and investments when in board and family meetings in Cleveland. Is it a hard sell?

My cousin Albert is definitely a very forward-thinking guy. Like I said, he was here in the '60s. He was out here dealing with the CRA in the '60s and '70s, and he always thought that L.A. was a great place to do business. Within an hour of downtown we've built over 8,000 housing units, so Southern California has always been a big market for us. It isn't too hard to get them to want to invest and put the corporate dollars into Southern California. It has been harder to focus back on downtown when we've had a couple starts that didn't take off like we'd hoped.

The one deal we have with CRA worked – it was an 80/20 affordable housing deal, and affordable housing is part of our core business. That helped convince them that that was a good idea. We also partnered with others, on projects like the Subway Terminal Building. We did that with Dwayne Cameron, and Albert had done business with him for over 40 years.

Those kinds of things helped me convince Cleveland that L.A. was a good idea on specific deals. Having to convince them that downtown is really happening again was a longer conversation, but for the most part, once they get convinced that a deal is a good idea, then they the city is an easier sell.

In our earlier conversation you mentioned that one of your brothers is interested in sustainability, which the annual report of Forest City lists a one of the company's core values. Elaborate on how this goal manifests itself in the company's residential development projects in L.A.

When my brother John joined the company four years ago, he came in with a real bent on sustainability and green building. He was living in Portland, so he got it from there. But he was my brother, so everyone thought we could bring him into the fold and get him thinking like us. Well, it turns out that his ideas started to spread in the company. Then the industry sort of woke up to the idea that sustainable development and green building and healthy building is actually probably the best practice, not just the right thing to do.

As it started to gain momentum within the rest of the development community, our group in Forest City, particularly the residential side with what we did at Stapleton in Denver, began to see green building as a potential competitive advantage, especially when we work in cities.

All the cities now are asking about recycling programs and sustainability programs and how developers are going to be more energy-efficient. Having a track record of doing sustainable development is a competitive advantage. Going forward, it brings operating expenses down and you have to do less work on turnover. Now, the difficult part is whether it's going to cost more to do that or, conversely, whether people will pay more to live in an environment like that. I think the jury is still out of that one. With Title 24 in Southern California you do a lot of green building anyway. You have to be energy-efficient, you have to use low-heat glass, and you have to do a lot other things that a lot of states don't make you do. As we look at new projects, when we sit down to talk with architects and contractors, we tell them we want to make it a green building right from the beginning.

As you said, Forest City is involved in markets all over the country. Where is L.A., and where does it need to go compared to the other premier markets you're in? What makes for a continuing increase in residential development value?

As more of these buildings go up and more people move to downtown, downtown will become more desirable and more people will want to move in. As we see these sort of buildings that are in the pipeline right now, either in planning or construction, get rented out, filled up and sold out, the next wave of building that you see, whether its retail or office or entertainment, will have a huge impact on the values in downtown. If land is used for something other than residential and it continues to increase the desire to be in downtown, then the existing residential will obviously increase in value.

Manhattan is obviously the best example of a scarce market. We're doing a building in lower Manhattan which is a hospital, a high school, an apartment building, an office building and a condo building all in one 72-story tower designed by Frank Gehry. That is an extreme example of driving value and the scarcity of land and mixed-use, etc. If I told you I was going to build a high school and put a high-end condo building over it in downtown Los Angeles, people would think that I was absolutely crazy, but if you talk to people in New York about it, it's no big deal.

There are opportunities everywhere. Another town that we're in right now which was just mentioned in the Wall Street Journal is Dallas. We went into Dallas and are now buying five or six buildings, and the city's giving us three buildings. We're going to do something like 900 apartment units and about 200 condo units in downtown Dallas. With that the city's coming in and taking an active role creating parks and streetscapes and helping developers get properties that are underutilized. It's becoming a very vibrant place very quickly, and you need a combination of government and private sector and have people with a desire to live in those kinds of environments.

Let's close with your thoughts and recommendations for the officials of Los Angeles to consider as they fill vacancies in the planning department, the transportation department, and the redevelopment agency. What do those appointments mean for the private sector developers and for the realization of a healthy and vital downtown housing market?

Those are three critical positions for housing and development in Los Angeles. Obviously, I think the planning department in Los Angeles needs to look to the future as to how they want the city to operate. They need to plan the city as a whole, to increase density and reduce the effect of traffic. It's time to move past urban sprawl development with low density development hop-scotching farther and farther away from employment. I'm a believer in redevelopment agencies. I think that when they operate efficiently they can be great assets to the development that takes place because they do things like parks and streetscapes. They look at larger areas and have a goal in mind when they direct project development.

I think that the challenge is to pick people who can be very forward-thinking and look to the great cities of the world and move Los Angeles in that direction.