Related's Witte On Recession's Impact on Downtown Submarket

A recent article in the L.A. Times entitled "Downtown Not the Center of it All," focused on what it characterized as the slumping Downtown L.A. development market. Did that article fairly describe the economics of both your project and downtown's current real estate market? Is Downtown not "the center of it all?"

The media, as is so often the case, has been guilty of both over-hyping the boom and being overly negative about the decline. That's not unusual, and the L.A. Times is no different from the rest of them. That article, in particular, completely missed the boat. From all the data I've seen, the Downtown submarket is doing as well or better as any other submarket. The missing context from that article was that it suggested that Downtown was doing worse than other submarkets. That's simply not true, with the exception of the really high-end coastal areas. It's doing much better than the most of the suburbs.

The article failed to distinguish among the submarkets within Downtown. It focused on what I loosely call lofts and the loft district. To be sure, adaptive-reuse condos became overpriced and have suffered accordingly, more than other projects. It's not that there's no demand for lofts in the Historic Core or the Arts District, but not at $800-900,000 a unit, which is where the market had gone.

If you look elsewhere in Downtown, particularly at the relatively smaller number of newer and high-rise condos, most notably the South Group projects near Staples Center, the Market Lofts project, and the Ritz-Carlton condos in L.A. Live by AEG, you see a very different story. The entire real estate market is suffering right now for all the obvious reasons. Downtown is no exception to that. But there is a much more diverse story Downtown than that article suggested.

To your question about our project, we have always believed, from day one, in the middle of the boom, and in the current slowdown, that Grand Avenue, if planned and executed properly, would be the highest-end Downtown location for a variety of reasons: its location in the city's cultural center, across from Disney Hall; we are providing a unique, vertically integrated, mixed use project, which really hasn't been done in L.A. before, where the values typically are the highest in their respective submarkets; and the value provided by the Mandarin Oriental Hotel, which, when it opens, will be the nicest hotel not just in Downtown, but all of Southern California.

The good news for Downtown, at least in the high-rise world, is that relatively little has actually been built. A lot has been spoken about and announced, but there really isn't that much available product.

Since TPR last interviewed you a year ago, much has changed. Give us a status report on Grand Avenue.

The Disposition and Development Agreement (DDA) was approved by the city, county, CRA, and Joint Powers Authority last February. At the time, it was envisioned that we would start demolition in October of last year. Shortly thereafter, because we were a little behind on our design schedule, we moved the start date to December of last year. In the ensuing period, the project's approved entitlements and approvals were challenged by the owner of the Bonaventure Hotel, largely on the grounds of an objection to the approval of a transient occupancy tax rebate for the Mandarin, much as the Bonaventure had challenged the similar approval for the L.A. Live project.

We settled that lawsuit late last year, which has since been dismissed, but that caused a delay in our process, as well. We did begin in December, as planned, with the abatement of lead paint on the "Erector Set" garage on the site, required before starting demolition. We are currently working out the final details with the county to begin demolition of the parking structure, hopefully within the next month. We replaced our initial equity partner, CalPERS (through MacFarlane partners), who decided not to invest in the project, with Istithmar, a sovereign fund run by the government of Dubai. The various agencies approved that partner last month.

We expect to close a construction loan by late summer range, after which we will begin site excavation. From that point, we expect to complete the first project-the Phase I of the three phases-by the end of 2011 or the beginning of 2012.

TPR has been publishing for over two decades, and over this period Downtown has experienced several booms and busts, with each boom reaching a plateau higher than the last. What will the Downtown housing market be like in four years?

Obviously nobody knows for sure. One of the reasons there has been a lot of attention on Downtown, and one of the reasons why it still has a ways to go in increasing value, is because what you've seen to date residentially has occurred largely without a lot of the amenities that are typically desired by residential buyers and renters. They're beginning to come: restaurants, clubs, and shopping. L.A. Live should be complete by 2010. When the first phase of Grand Avenue opens, it's also going to add a lot.

That is going to continue the appeal of Downtown, even relative to other submarkets in the city and the area, which are largely built out. I think Downtown has the most room to grow, but you have to keep it in context. No one is suggesting that Downtown is going to become, or wants to become, or even should become, Beverly Hills or the Westside. It's going to have its own unique attributes. With the exception of Hollywood, there are very few other places in urban L.A. where high-density development is going to be allowed to happen. It's not an accident that there is so much attention Downtown.

Grand Avenue includes one such amenity-a large scale park. What is the status of this open space component of the Grand?

The park refers, of course, to the roughly 16 acres owned by the county between Grand Avenue and City Hall. It's essentially four parcels crossed by a number of north/south streets, the upper part of which is flanked by the Courthouse and the Hall of Administration. The plan for the park has been and continues to be that the $50 million that we prepaid for the 99-year lease for Phase I will go into funding the redevelopment of the park. That actually has grown to $56 million now, with interest. The landscape firm Rios Clemente Hale has been engaged to produce a schematic design for the park.

On April 22, there will be a public viewing of those preliminary plans at the Music Center. Ultimately, any changes made from that will then go to the various bodies for approval. We expect that construction on the park will start this year and be finished in 18-20 months, per our development agreement, before the opening of Phase I.

Along with the county, we are also applying to the state under the Proposition 1C bond program for another $30 million for the park. We are optimistic that in addition to the $56 million that currently exists, before any private fundraising is contemplated, there will be significant resources provided for the park.

The key to this park will not just be its planning and design but also its programming. We have engaged a woman named Mary McCue whose firm is responsible for the programming and operation of a number of parks, notably Yerba Buena Gardens and Union Square in San Francisco. We think that there is almost unlimited opportunity to activate this park for a wide variety of people and events with the proper programming. Ultimately, the park will be run by a to-be-formed 501c3 non-profit organization.

We have met on a number of occasions with the people who run Millennium Parkin Chicago, Prospect Park in Brooklyn, and Central Park among others. They've looked at the preliminary concepts and given us some feedback.

A senior analyst has said that the current housing downturn is unique because 70 percent of the private residential developers are publicly owned,and they have no interest in holding onto their properties and stabilizing the market. In past recessions, private builders dominated and they typically held supply until the markets settled. Does this analysis explain the severity of the current slump?

There are several things that are unusual. What you described is part of it. As best as I can describe it, this downturn flows from a series of events in the financial markets as opposed to the more common culprits of oversupply or loss of jobs. There is good and bad in that. The good is that the fundamentals in the market in terms of supply and demand, and at least so far in employment and unemployment, are much better than in prior downturns. On the other hand, there is more of an unknown factor. People don't really know yet how all this financial chaos is going to play out because they haven't seen anything exactly like this before.

Buyers also don't know what the price will be if they wait. If every builder dumps at the same time, might prices continue to free fall?

I don't know that that's unique. For example, the downturn in the early ‘90s was driven by job loss, and there was a precipitous drop in price as well, particularly in the most vulnerable areas. The greatest drop in price and the greatest uncertainty is in the markets with the greatest supply: suburbs in general, the Inland Empire, and the Antelope Valley to a lesser degree-where the effects of sub-prime lending have been greatest.

That is not the case in most of the urban markets, including Downtown. Has there been a drop in prices? Yes. Will there continue to be? Somewhat. Almost two-thirds of the 224 Ritz-Carlton condos in L.A. Live have been pre-sold at prices of around $1,100-1,200 a square foot. That tells a somewhat different story.

In every downturn, there are those who find opportunity. Related is one of the largest developers in the country. Where are the opportunities emerging from the recession?

Related is and always will be principally an urban developer. We are carefully looking now in California at select opportunities: in San Francisco, where the market has held up relatively well, a couple down here, and in San Diego, where we're involved in a mixed use project. For us, the opportunities are greatest in our core urban markets, particularly on well-located sites that may have undercapitalized developers. A company like Related-especially as a privately held company that recently sold a 25 percent stake in the company for $1.4 billion to a consortium of funds led by Goldman Sachs and Michael Dell's investment fund-benefits from having the wherewithal and the ability to attract financing in this climate that others don't.