URBAN BOOSTERS have embraced a new panacea for what ails central cities, including downtown Los Angeles — residential high-rises and converted luxury lofts. But like the dot-com boom in the late 1990s, the downtown residential building craze is based more on hype than on economic fundamentals. If the announced projects ever get built, many cities will be stuck with a glut of overpriced housing when market fundamentals reassert themselves.
The roots of today's lofty delusions lie in the global property boom. Propelled by low interest rates and a lack of attractive investment alternatives, individuals and institutions are sinking their money into property. This has created both opportunities and foolish speculation. Central-city areas need more housing, but the way developers are building defies economic and demographic forces. For decades, the vast majority of net employment growth nationwide occurred in the suburbs. Since 1969, New York City, the nation's premier downtown, has not created a single net new job.
During the dot-com and stock market bubbles, ambitious young people, lured by the promise of money and perceived opportunities, flocked to central cities. Manhattan, San Francisco, Boston and Portland, Ore., were poised to become the pulsing heart of the U.S. economy.
After the 2000 market crash, most cities lost jobs, including high-paying ones in financial and business services. Office vacancy rates soared, and developers quickly shelved plans for new office towers. This helped spark the downtown housing boom as builders converted under-occupied office space into apartments and condos. With corporate headquarters and entrepreneurial companies still moving to smaller cities and suburbs, many big cities have bet their futures on becoming lifestyle, tourism and entertainment centers.
The development of residential communities around the new downtown cultural and entertainment venues is an essential part of this new urban economic strategy. Downtown residents would provide the kind of "24/7" street presence that makes places such as Manhattan so appealing to tourists, artists and rich people.
To fill reconverted offices as well as new towers, developers and urban planners increasingly look beyond natural urban emigres — gays, singles, artists, young couples — to aging baby boomers with suburban bankrolls. There is not much evidence to suggest that these people want to become pioneers.
Roughly three-quarters of retirees in the first wave of boomers appear to be sticking close to the suburbs where the vast majority now reside, according to Sandi Rosenbloom, a professor of urban planning and gerontology at the University of Arizona. Those who migrate, her studies suggest, tend to head farther out into the suburban periphery or to smaller towns, not downtown.
Rosenbloom says job commitments or a desire to keep close to children or grandchildren explain some of her findings. About 40% of retirees expect their kids to move back in with them at some point, according to one survey. More critical, most boomers are not acculturated to the density, congestion and noise of inner-city life. "Everybody in this business wants to talk about the old person who moves downtown, but it's basically a 'man bites dog story,' " she said. "Most people retire in place. When they move, they don't move downtown, they move to the fringes."
The latest census numbers support her view. Many of the cities that enjoyed a modest and much ballyhooed demographic rebound during the late 1990s — Minneapolis, Chicago, Boston, San Francisco — have since lost population. Cities still gaining residents are doing so at a markedly slower rate. Such traditional population losers as Baltimore, Philadelphia, Cleveland and Detroit continue to experience out-migration.
The increase in downtown residents in demographically declining cities is a bright spot. But it too should not be exaggerated, particularly compared with growth in the suburbs. If you add up the 2010 growth projections of the nation's 20 largest downtowns, according to estimates by the Fannie Mae Foundation and the Brookings Institution, it does not equal last year's increase in San Bernardino-Riverside counties.
On top of this, more recent data indicate an emerging weakness in downtown residential property, including such "hot" markets as downtown San Diego, London and Sydney. In Los Angeles, according to DataQuick Information Systems' most recent numbers, values in some areas have risen steeply, but those in many others have either dropped over the last year or climbed only modestly. Downtown L.A., for the most part, is not performing better than other areas of the Southland.
Most problematic is that many buyers of downtown units are speculators, often using risky interest-only loans to finance their purchases. About 30% of the buyers in downtown San Diego, according to industry experts, are investors. In such markets as New York and Miami, a large proportion of buyers are out-of-towners, including many foreigners purchasing second or third residences. This exposes downtown housing to far greater volatility than areas where most owners are year-round occupants. After all, a "flipper" foreign investor or part-time resident is more likely to ditch a unpromising investment than someone whose property is also a home. Even if such people hang on to their properties, they don't fit the 24/7 model resident envisioned by urban planners and developers. Many owners of downtown residential properties actually spend much of the year elsewhere, escaping hot weather in some places and cold in others. This explains why during weekdays, even successful downtown developments such as Denver's LoDo district are no more bustling than a suburban strip mall.
Where will all this leave downtowns, including L.A.'s? Bill Witte, president of the Related Cos., developers of the 25-acre Grand Avenue Project, said that most of the 20 or so major residential towers planned for downtown will never be built. Uncomfortable with the project's grandiose language of creating "a Champs-Elysees for Los Angeles," Witte foresees a more modest niche for downtown as a residential center.
In some ways, a sharp drop in downtown residential property values may be the best thing to happen to downtown long term. Well-heeled investors and speculators, no longer confident of flipping their $600,000-plus properties, would have to sell to workers, artists and young professionals, or rent to students, the kind of people who have turned places such as Manhattan's Soho into vibrant street-level neighborhoods.
Even so, don't count on downtown L.A. becoming another Soho. It may never fully compete with the Miracle Mile, West Hollywood, Pasadena or the beach as an urban lure. These areas have fewer dead spots created by freeway ramps, parking lots and government buildings. They offer more attractive pedestrian streetscapes and more places to go. But the right policy and reasonable expectations could transform parts of downtown into an exciting, slightly offbeat alternative community amid L.A.'s vast suburban archipelago.