February 27, 2023 Bianca Barragán, Southern California
Los Angeles’ office market has been on a bumpy road, along with basically every other major city in the U.S., for years now. But as the challenges continue, the bumps are also leaking out into other sectors of commercial real estate.
Multifamily in particular has enjoyed a strong run in the years following the pandemic’s arrival, but the tide could be turning in Downtown LA, according to panelists at Bisnow’s Los Angeles Multifamily event.
“With the change in interest rates and the change in cap rates, there’s a complete freeze of the debt markets and, really, a destruction of value” unlike anything he has seen in his career, Cityview CEO Sean Burton told the audience at the Westin Bonaventure in Downtown LA, which hosted the event.
That said, the fundamentals of the multifamily business are still very strong, he said. There is still job growth and there is growth in renter demographics.
“We’re still positive, but it’s been a really interesting and bizarre six months,” Burton said.
Downtown might be a different story. With office vacancy near 30% and worsening perceptions of the neighborhood’s crime and homelessness issues, Burton said that DTLA was “the worst I’ve ever seen it since I’ve lived here.”
Burton was onstage with Jamison Realty CEO Jaime Lee, whose company has invested in Downtown in the past and is working on securing entitlements for a massive new development. Lee expressed similar concerns for the trajectory of Downtown.
Jamison Services, the umbrella under which Jamison Realty exists, is redeveloping part of the Los Angeles World Trade Center into a 41-story multifamily tower that is going through entitlements, Lee said.
“It’s tough,” Lee said. “When you see that cap rate expansion and interest rates are going high, the premise on many of these investments comes under question. … I think people are really starting to look under the hood on the model.”
The effects of shifting attitudes toward the office are playing out everywhere, not just in Downtown, and affecting the way many multifamily developers assess their next investments. Burton said the future of office is something that plays heavily into his firm’s calculations for new projects.
“We struggle with this question a lot; our philosophy as a firm is to build and buy multifamily near job centers,” Burton said.
In the markets where Cityview builds, Burton said he doesn’t think five days a week in the office is ever coming back, but two or three days in the office is already here for a lot of people.
“What’s interesting is, if you do go to work three days a week, you can’t live 500 miles away and do that,” Burton said.
The future of some of the offices that will be left behind as the world of work adjusts to a more hybrid workplace was another topic of conversation.
Although the repurposing of old office buildings in Downtown through the adaptive reuse ordinance is largely credited with fueling the renewed interest of young professionals and investors in the neighborhood in the early 2000s, panelists threw cold water on the idea that conversions to multifamily were going to be a savior for the office market this time.
Hurdles include not only the cost of acquiring the buildings themselves but also the complicated and expensive nature of rejiggering the building to serve an entirely different user, panelists said.
“When we go through the underwriting exercise for these buildings, we take the top three GC bids and then we add them all together,” Geolo Capital Vice President of Investments Jake Michaels said.
“So, [it’s] not really the solution that we want it to be,” Ervin Cohen & Jessup partner Elizabeth Dryden said.