Downtown Los Angeles bustles with activity from 7 to 7, but when the sun goes down “you could roll a bowling ball down Figueroa and not hit a car,” jokes Chris Maling, senior director for Marcus & Millichap's National Retail Group. It's true that by day the central business district (CBD) population is 125,000 to 150,000, but after dark it's pretty much a ghost town.
Times are a-changing, though. With the advent of Staples Center, the dramatic new Our Lady of Angels Cathedral, new restaurants and now the Frank Gehry-designed Disney Concert Hall, Maling says, “people who work downtown are staying longer.” But the most excitingis downtown's impending rebirth as a 24-hour, live-work-play city.
Thanks to city officials' relaxing rules for mixed-use development in the CBD a few years ago, about 50 projects, with more than 6,000 residential units and more than 1 million square feet of retail space, have been completed or are underway or planned in downtown. The idea was to encourage residential development and preserve the city's historic structures.
Most of these projects do involve adaptive reuse of historic or obsolete office and industrial structures, of which the largest to open so far is Kor Realty Group's Pegasus. This $53-million conversion of Mobil Oil Company's 1940s-era headquarters building to 322 apartments, with 12,000 square feet of ground-floor retail space, opened in July and was 30 percent leased up a month later.
Some of the proposed downtown retail space is geared to visitors or office workers, such as the 300,000 square feet proposed in the Staples Convention Center complex. But at least half of new retail development is earmarked for neighborhood retail services, says Maling, noting that this represents a major shift in the CBD's retail sector, which currently exists primarily to serve downtown's transient workforce.
Downtown's garment and jewelry districts and the Olvera Street Mexican market do draw a steady stream of retail traffic from outside. But “existing retail is anemic at best,” he continues, noting that aside from the 7th St. Marketplace, a two-story mall anchored by Robinsons-May, the downtown retail landscape consists mostly of mom-and-pop shops and national storefronts such as Mrs. Field's Cookies.
The most critical component in downtown's residential revival is a 50,000-square-foot Ralph's Grocery, emphasizes Kevin Ratner, whose company, Forest City West, is underway on Metro 417, a 500,000-square-foot project that will convert the historic Subway Terminal Building into 277 upscale apartments and 125,000 square feet of commercial space. Noting that there hasn't been a major supermarket in downtown for at least 30 years, he says that the new Ralph's is the spark needed to jumpstart in migration of residents to the CBD.
Ratner predicts that downtown's residential community will attract a young, hip crowd in search of 24-hour urban lifestyle and cultural amenities along with older professionals who already work there. Maling notes that some people who work in downtown are moving in permanently, and others with homes in outlying communities such as Ojai or Valencia are staying in lofts Tuesday through Thursday.
He expects the evolving residential community, along with the new light-rail transportation network that now links downtown with communities from Riverside to Ventura, to bring more employers back to the CBD too. “Companies that fled downtown to the Westside 20 years ago are taking a look at their bottom lines and considering the lower (office) rents here. That's a value, as a result of all these new services in downtown,” he explains.
The Ralph's, which broke ground in May, is part of CIM Group's $247-million South Village project, which will be developed in four phases and involves 1,200 loft-style apartments and condominiums, with 120,000 square feet of ground-floor retail space, on a 7.2-acre site in the South Park district. CIM Group's Vice President of Leasing Jeff Kreshek says, “People are starting to realize the benefit of living and working in downtown, and many retailers have it on their radar screen for the first time. If not, they should start looking at what's happening here.”
Next door in the Garment District, MJW Investments Inc. is underway on Santee Court, a $130-million project, which is converting 10 early 20th Century manufacturing buildings to 578 loft apartments and for-sale condos, 110,000 square feet of ground-floor retail, and fashion showroom and studio space. The project will also mitigate the district's parking problem withof a 422-space parking structure, for which the city is kicking in $1.5 million. Similar to CIM's project, retail here will cater to residents day-to-day needs. But in keeping with the ambience of the garment district, MJW President Mark Weinstein says, fashion retailers will be included in a dynamic mix that includes a sushi bar and other eateries, a corner market, and possibly a rooftop bar.
Santee Court is being developed in three phases, and pre-leasing is underway for the first 165 residential units scheduled for completion in October. However, “retail vacancy is zero,” says Weinstein, noting that the Garment District, which does $9 billion in trade and retail sales annually, has the highest walk traffic in town. “As soon as space becomes available, it's gone,” he says, adding that only thing holding up the first retail openings is user entitlements.
Weinstein plans to develop Phase III of Santee Court next because it involves 117 for-sale residential and 20,000 square feet of retail condos, both of which are in high demand. The Lee Group Inc.'s Flower Street Lofts condo project was the litmus test of for-sale product demand downtown, he says, noting that people began inquiring about units before the project broke ground. All but a few of the downtown projects are rentals, says Weinstein, mostly ones that wouldn't have panned out without historic tax credits.
And until The Lee Group tested demand, lenders had been reluctant to finance for-sale residential in downtown. Santee Court was entitled for development as for-sale condominiums and will be built to condo standards, he says. Phases I and II are being built with historic tax credits, so units can't be sold for at least five years.
Some other residential projects with retail space completed, underway or planned include the Higgins Building (7 spaces), The Gas Company Lofts (18,445 square feet), The Piero (10,000 square feet), 901-909 S. Broadway (15,500 square feet), The National (retail pre-leased), The Douglas Building (20,000 square feet), Victor Clothing Building Lofts (5,000 square feet), The Yards, 1st & Alameda (30,000 square feet), and Staples Center Phase III.
Non-residential mixed-use with retail components include the Union Station Project, Pershing Square Center, First Street Properties, Staples Center Phase II, Metropolis Project (300,000 square feet), Grand Avenue Promenade, and Clark Hotel.
Additionally, retail space at ARCO Plaza is being reconfigured and downsized from 250,000 square feet to about 110,000 square feet, of which 20,000 to 25,000 square feet is earmarked for restaurants on the Plaza level, according to Joe Paggi, retail consultant for building owner Thomas Properties.
This is a case of “less is more,” he says, noting that Level B will continue to have a food court, but smaller retail spaces will be consolidated into larger floor plates to attract quality tenants, and a portion of the lower levels will be converted to back office and parking space.
Currently, downtown retail rents average $22.23 per square foot, which is comparable to the rest of the region. However, vacancy at 11 percent is double the countywide average of 5.2 percent, and properties are trading at an average cap rate of 8.9 percent, compared with 7 percent to 8 percent in communities with a stable population base.
However, that's likely to change, especially in downtown residential neighborhoods where asking rents are already higher. For example, the CIM project has asking rents between $18 and $48 per square foot, depending on size, and Weinstein's retail is going for between $27 and $36 per square foot.
“I'm very bullish on downtown retail,” Maling says. “It's very fragmented right now, and a lot has to happen — come together — over the next five to 10 years. But as more people move in, more strip and community retail will come into play, and people will say ‘I need to be in that market.’”
Market Profile/Downtown L.A.
Total Population 2003 Los Angeles: 9.8 million
Unemployment Rate Los Angeles: 6.8%
Per Capita Household Income Los Angeles: $30,611
Median Home Price Los Angeles 2003: $312,000
Median Home Price Growth Over 2002: 16%
Median Household Income Los Angeles: $42,189
Source: Economy.com; Marcus & Millichap
Average Downtown Rent Per Sq. Ft.: $22.23
Average Retail Vacancy Rate 2003: 11%
Average Retail Property Cap Rate: 8.9%
Asking Rents For Triple-Net Lease Properties Los Angeles: $22.88
Total Retail Completions Los Angeles 2003: 4.2 million sq. ft.
Source: Economy.com; Marcus & Millichap