A fickle economy, rising construction costs, and skittish buyers are just a few of the factors that have slowed the frenzied development in downtown Los Angeles to a crawl. But as two of the area’s largest planned projects—Frank Gehry and the Related Companies’ $3 billion Grand Avenue Project and the $1billion Park Fifth condo towers—failed to break ground as expected during the last few months, and as several smaller projects went under, hushed conversations between architects, developers, and real estate agents persist in the shadows of half-finished skyscrapers: Is downtown’s rally over?
“I have the feeling that this is not a good time to be building skyscrapers, in LA or anywhere,” said Peter Slatin of the real estate website TheSlatinReport.com (and AN contributor). “It’s risky to start building into a market that’s starting to decline without knowing how long the decline will last.” According to the National Association of Realtors, U.S. condosales were down by about 11 percent in 2007, while residential construction dropped by almost 17 percent.
According to most projections the numbers aren’t expected to improve this year. Although materials prepared last year for Grand Avenue (which would include 19- and 48-story towers and a 16-acre park) indicated that Phase I of the scheme was scheduled to begin construction last October, that date has now been pushed to this summer. Karen Diehl, a representative from Related, said that updates are being made to the design documents and, despite reports to the contrary, groundbreaking was never set to happen. “We’ve never set a groundbreaking date and at present it is expected sometime this summer,” she said. According to Diehl, an existing parking structure on the site needs to be stripped of its lead paint first, then will be demolished in “the next few months” so construction can begin. Meanwhile, reports that Related had not yet secured a construction loan spurred rumors that the mixed-use project was short on financing.
Groundbreaking for the 76- and 41-story towers of Park Fifth, once scheduled for the first quarter of 2008, has been pushed back to the third quarter. After reported staffing and investor shakeups, spokesperson Stephanie Holbrook now blames bureaucracy. “Park Fifth does not expect to have final entitlements for the project until the end of May,” she said. “Until these formalities are finalized, one would not start construction of a major project.” While the project was also rumored to have major financing issues, Holbrook said that financing is in place to move forward.
“Park Fifth was never a brilliantly-conceived project to begin with,” Slatin said of what he thought was the building’s inability to relate to its surrounding neighborhood near Pershing Square. But for Grand Avenue, he thinks the perceived inability to sell its 390 residential units is mostly due to Gehry himself. “They wholeheartedly bought into the idea that good architecture is added value but went with an architect who is not always the greatest fit for residential design,” said Slatin. “You have to find a lot of people who are willing to take that perceived risk for an apartment that’s kind of quirky.”
And a slew of projects on the way have endured similar delays or changes. The Parkside Tower, a 35-story mixed-use property downtown, has declared it has “no financing to move forward.” The Mill Street Lofts by Linear City—developer of the successful Toy Factory and Biscuit Company Lofts—is delayed until at least the fall. The Old Union Bank Building and the Blossom Plaza in China Plaza both recently switched from condos to rentals. Last May, the New York hotelier Gansevoort yanked its plans for “Gansevoort West,” leaving its developer, Chetrit Group, without a hotel partner.
“The capital and credit markets are extremely challenging right now,” said Jim Atkins, a principal with The South Group, a Portland-based developer that has three residential projects in downtown LA: Elleven, Luma, Evo (still under construction), and South Figueroa (now on hold). “That’s brought investment in new condo projects to a halt. You don’t have to be an expert to know that there’s a lot of instability and that we’re facing losses and problems.”
Timing, he noted, is what seems to separate the sturdy from the worried. Those who offered presales and secured financing a year or two ago did so during a robust economy. The slowing means that potential buyers today aren’t as likely to jump at a presale, which further impairs financing for any project with a residential component, said Atkins. For example, the 19-story Luma property had many buyers fall out of escrow before it opened in July. But they were able to resell those units as the property got closer to completion. “Buyers feel that if they buy today, the price might go down tomorrow,” he said. “There’s no incentive to buy six to nine months out anymore.” Their Evo project will be one of 2008’s largest debuts in a market many consider glutted. But Atkins says traffic to their sales office is good—relatively. “There’s still quite a bit of demand,” he said. “But there’s not as much as there was a few years ago.”
There is one glimmer of hope. The federal economic stimulus package which recently passed by President Bush will raise the conventional loan limit cap from $417,000 to $625,000, meaning that buyers who usually had to find higher-interest, high-risk“jumbo loans” for amounts over $417,000 can lock in to lower, more stable rates. “From our buyer’s perspective, more of the downtown market is accessible at that price point,” said Atkins.