DTLA Debate

DTLA Debate

While it’s no secret that downtown is struggling, characterized by high vacancy rates and overall low levels of activity, there seems to be a strong sense of optimism among many market experts, with some believing the neighborhood is on the brink of a major revitalization.

“We have a bold vision for downtown,” Jessica Lall, managing director of the downtown Los Angeles office at CBRE Group Inc., said. “We believe downtown is the anchor and the future for Los Angeles. It’s a diverse and eclectic community with many positive things happening, and we believe, in the next five years, downtown in particular is going (to become) the heart of our city.”

Jessica Lall

But while Lall and others may have strong hopes for a rebound, there’s no denying that last year alone was marked by a series of hardship.

“I think the downtown Los Angeles real estate market has been severely pressured post-Covid,” said Sam Newman, a partner at Sidley Austin LLP. “There’s been a lot of downsizing by large businesses (and) commercial concerns. Several of the larger, even prominent, buildings downtown have gone into receivership or been turned back over to their lenders.”

Market distress

In January of last year, Oaktree Capital Management took control of 444 S. Flower St., a 48-story, 914,000-square-foot tower in Bunker Hill after Coretrust Capital Partners LLC, the owner, failed to pay off several loans on the building. 

The next month, Brookfield Corp., one of the largest office owners downtown, defaulted on $784 million in loans. According to a Feb. 10 SEC filing, the firm failed to pay a $465 million loan package for the Gas Company Tower at 555 W. 5th St. and $319 million in loans for 777 S. Figueroa St.

In December, the 96-year-old Ace Hotel Downtown announced plans to close its doors at the end of this month after 10 years of operations in the refurbished former California Petroleum Corporation Building.

Also notable, the 1.1 million-square-foot Aon Center traded for $148 million. But despite being the biggest downtown office sale of 2023, the 62-story skyscraper sold for a massive bargain – 45% less than its last purchase price in 2014.

“Covid hit the (central business district) high-rise, vertical products the hardest,” Kevin Shannon, co-head of U.S. Capital Markets at Newmark Group Inc., said, noting that the work-from-home initiative has largely impacted the downtown office market. Shannon represented Shorenstein, the seller, in the Aon Center transaction. 

Office vacancy rates continued to soar and hit 26.8% in the fourth quarter of last year, up from 22.7% the previous year, also slightly above the county average of 26.5%, according to data from Jones Lang LaSalle Inc.

“You can have landlord-favorable markets. You can have tenant-favorable markets. You can have neutral markets. But it really takes all pieces working together in order for the market to thrive,” said Maureen Hawley, a senior vice president and downtown broker with an emphasis on tenant representation at JLL. “And given where the local and national and global economies have gone over the last probably five quarters and where inflation has gone, and then with the trouble of return-to-work, especially in the state of California, it’s been a confluence of factors that have really given this market the toughest of all horizons to look at.”

Barriers to entry

The distress in the market has led some developers to avoid the neighborhood entirely, including downtown-based veteran firm The Ratkovich Co., which is not currently underwriting any new deals in the area, although its leadership stressed this is not necessarily a permanent thing.

Brian Saenger, CEO of The Ratkovich Company. (Photo by Ringo Chiu)

“The word I would use at this point for the downtown Los Angeles market is challenged,” said Brian Saenger, president and chief executive of Ratkovich. “The couple of opportunities we’ve looked at in downtown Los Angeles, at this point we’re passing on them. We have been pursuing opportunities in other parts of Southern California. In all cases, we’re looking for real estate assets in prime locations that have the ability to withstand the vacancy that’s going on right now in the office market.”

Instead, the firm has found greater opportunities on Los Angeles’ Westside, with a particular interest in areas like Santa Monica, Playa Vista and Culver City.

Other experts noted barriers to entering the downtown market include concerns such as homelessness and public safety, with other minor barriers like the high cost of parking playing a role as well.

“I think safety is a big issue.” Sonnet Hui, general manager and vice president at Project Management Advisors Inc., said. “I think all these issues go hand in hand. If we don’t deal with the homeless population, they’re starting to migrate to other pockets of downtown, which is making a lot of people feel unsafe, unfortunately. And I think that safety is a priority for a lot of employers.”

Core strengths

Yet despite all these difficulties, strong demographics seem to favor downtown Los Angeles, according to a report from CBRE.

For starters, the area’s population skews younger, with prime working-age adults – people between 25 to 54 years old – making up 48.9% of downtown’s total population, the second largest share out of the greater Los Angeles submarkets, just behind the Hollywood and Wilshire Corridor area. 

And according to DTLA Alliance, a coalition made up of nearly 2,000 property owners dedicated to building and maintaining a safe and productive downtown – which recently changed its name from the Downtown Center Business Improvement District – downtown contains nearly 20% of all the city’s jobs, despite only accounting for 1.4% of its land area.

“We have a really unique mix of people and neighborhoods and building types and community and culture,” said Nick Griffin, executive vice president of the alliance. “In some ways, it’s really the only true sort of urban area of Southern California. And there’s a high demand for people who really crave a dynamic urban lifestyle.”

Nick Griffin

Downtown leads the charge in housing supply, accounting for 28.7% of all multifamily unit completions in the Los Angeles region since 2004, with 22,600 new multifamily units having been built.

But despite the increase in unit construction, the area tends to stay more affordable than its wealthier counterparts, especially in comparison to Los Angeles’ beachfront communities.

For example, the Santa Monica and Marina del Rey submarket is 30.3% more expensive than downtown, according to CBRE. That gap exceeds the typical income-to-rent ratio benchmark of 30%. This relative affordability, coupled with walkable amenities, is attractive for a younger workforce, according to CBRE.

The neighborhood is also the regional transit epicenter, home to many of Los Angeles’ most notable cultural, sports and entertainment venues, including The Broad, Museum of Contemporary Art, Regent Theatre, Orpheum Theatre, Crypto.com Arena, The Grammy Museum, Fashion Institute of Design and Merchandising Museum and Hstudio Downtown, among many others. 

Combined, these venues attract millions of visitors a year, and a further surge in tourism is anticipated as Los Angeles is expected to be in the global spotlight throughout the decade as it hosts the 2028 Olympic Games and other high-profile events.

Residential renaissance

“Downtown as a whole has been evolving over the last 20-plus years from being a kind of 9-to-5 business district to really being a 24/7 mixed-use destination that has residential and retail, hospitality, hotels, restaurants – all of the things that make a great city,” Griffin said.

And while downtown is certainly experiencing some roadblocks, many experts agree a residential renaissance for the area has been long coming, dating back to the establishment of the adaptive reuse ordinance in 1999, when it became easier to convert the area’s vacant and underutilized buildings into new uses such as housing and hotels.

At the end of last year, Sonder Holdings Inc. opened two new hotels downtown, the Craftsman and the Winfield, both of which are examples of adaptive reuse, having previously held office space.

And the demand for new housing has picked up, too.

To accommodate the anticipated growth, the Los Angeles City Planning department has drafted the Downtown Community Plan, or DTLA 2040, which, according to the city’s website, “lays out a sustainable, equitable and inclusive future for the city’s urban core.”

As suggested by its name, the plan projects an increase of 70,000 apartment units, 55,000 jobs and more than 175,000 new residents by the year 2040. It accommodates the expansion of by-right development – permitting the swift approval of new housing developments that comply with all applicable laws and regulations – from 33% of the downtown area to over 60%.

And development is already well underway.

Living: Figueroa Eight features 438 residences.

Last year, some large multifamily developments opened, including Ava Arts District, which features 475 apartments over 61,000 square feet of retail space; Beaudry, a 64-story residential tower with 785 units; and Figueroa Eight, a 41-story building boasting 438 units.

New construction

Currently under construction are Alloy, which will become the first high-rise development in the Arts District and feature 475 apartments over 100,000 square feet of office space; Olympic and Hill, set to be the city’s largest residential high-rise at 760 feet; and Weingart Tower 1A, a 19-story permanent supportive-housing project.

“I think the key to any thriving city is people living there,” Keith McCloskey, a principal at downtown-based architecture firm KTGY, said. “While downtown has always had some housing, there’s been kind of an imbalance there, which I think we’re at a point where DTLA 2040 is going to help bring things back into proper balance.”

In order to address the city’s homelessness crisis, KTGY has created a proposal that could dramatically decrease the population of Los Angeles’ unhoused community. If built, The Essential, as it is named, is intended to flexibly accommodate up to 4,690 formerly unhoused individuals by offering permanent shelter in Skid Row.

Similarly, last summer, Related California and Weingart Center Association closed escrow on a 1.12-acre site downtown that will become the largest 100% permanent supportive-housing development in the city of Los Angeles. The site, which is now a parking lot in Skid Row, will be the foundation for 600 San Pedro, a 17-story high-rise.

All of this housing activity has encouraged retailers to think twice before removing downtown from their plans.

“People don’t necessarily shop where they work, they shop more so where they live,” said Justin Weiss, a vice president and retail leasing expert at Kennedy Wilson Property Services.

The area has successfully lured tenants to sign new leases downtown, including brands such as Adidas, Kinokuniya, Dave’s Hot Chicken, Mastro’s Restaurants, Suehiro Cafe, The Sauna Lab, and Pine and Crane.

Last year, Project Management Advisors relocated its corporate headquarters from one downtown office building to another, a move illustrating faith in the market. 

Some other notable downtown office leases include Conde Nast, which signed a new lease at Row DTLA, a 32-acre mixed-use retail and office district in the Arts District that has secured more than 300,000 square feet of office leases since January 2022, and California Appellate Project of Los Angeles, which recently renewed its lease at Biltmore Court for another 10-year term, representing one of the largest office deals in downtown in the fourth quarter, according to CoStar.

And with the ticking clock of the Olympics coming up, the goal for many is for downtown to be up and flourishing within the next four years, defined by low vacancy rates and increased confidence in the market.

Currently, the Los Angeles City Council is working to expand the Los Angeles Convention Center before the arrival of the games, which would represent a roughly 45% increase in the total size of the convention center, expanding its total size to 2.2 million square feet.

The plan calls for the addition of roughly 700,000 square feet of space in a new exhibition hall bridging over Pico Boulevard, as well as renovations of existing facilities, plus a new 37-story, 861-key hotel planned to complement the already-existing J.W. Marriot and Ritz Carlton hotel complex. The addition would make the Marriot the largest in Los Angeles based on room count and the second largest hotel in the state of California.

“To build a high-rise 30-story luxury building, you have to have a lot of confidence in the market,” Griffin said. “It’s a major investment. It’s a long-term undertaking. The fact that development has really dominated the marketed in recent years just expresses a lot of confidence in where the market is.”

Read More:
Real Estate Quarterly Q4

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