New Development Trend an Answer to Housing Crisis
Exciting visions of a new “old” frontier in real estate are inspiring developers and financiers in Southern California--and throughout the state and nation.
Developer Christopher Hammond, who broke ground Tuesday on the Chesterfield Square retail project in South-Central Los Angeles, plans to develop loft apartments in downtown Los Angeles in an area he calls “skid row adjacent.”
Ira Yellin, whose Urban Partners firm has developed apartments above Grand Central market and other landmarks in downtown Los Angeles, sees residential projects stretching to USC and beyond into South Los Angeles.
The trend is called infill development, a term that denotes refurbishing of existing structures and creation of new buildings in established urban areas.
Population growth is pushing the trend. With Southern California growing by roughly 6 million people, or 38%, in the next two decades, “living in central areas with less commute time and more amenities will become more attractive,” Yellin says.
At one level the trend reflects fashion--the desire of urban professionals for a city lifestyle. But at another level it reflects the serious need of employees and businesses to be near each other or accessible by convenient road or transit.
Major investors already see opportunities. “Our real estate consultant told us that infill development can offer 12% to 15% returns on investment, higher than conventional projects,” says Patrick Mitchell, chief investment officer for the California State Teachers’ Retirement System, which has launched a $750-million fund committed to infill development in West Coast cities.
Shamrock Partners, the investment company of Stanley Gold and Roy Disney, is managing a fund for Genesis L.A., the city’s effort to back projects in 15 urban sites, from the San Fernando Valley to East and South Los Angeles. California Public Employees’ Retirement System (CalPERS) is investing in inner-city development through Commonwealth Partners and Magic Johnson’s Johnson Development Corp. In the Bay Area, the Shorenstein family funds are investing in downtown Oakland.
Long Beach is making visions reality, with extensive residential development around its refurbished central core. “We needed residential housing to save downtown,” explains Douglas Otto, head of strategic planning for Long Beach. “Commercial development of restaurants and tourist attractions wouldn’t do it, nor would relying on the business community to stay around at night.”
Most inner-city projects remain public-private partnerships, with tax credits attracting wealthy investors to low-income housing. Hammond gained experience and built his company, Capital Vision Equities, in eight years of doing affordable housing projects. He continues to work in housing, with backing by new investors such as the Infill Development Fund of Commonwealth Partners.
But Hammond, 44, wants to take on projects beyond the sphere of tax-assisted housing, with its connotation of social work. “There’s a disadvantage to being categorized as a South-Central L.A. developer. It makes it difficult to raise cash,” says Hammond, a UCLA law graduate who came to urban real estate from involvement in politics with late Los Angeles Mayor Tom Bradley.
Chesterfield Square, a $75-million shopping center being developed by Capital Vision and Katell Properties, is a breakout job for Hammond because it is privately financed. He and his partners have $4 million invested in the project.
Next, Hammond plans to renovate a building near Hancock Park for senior housing and to redo downtown’s old Pacific Electric building into loft apartments.
The area today is shabby, with derelicts sleeping in doorways and nearby hotels used as homeless shelters. But renewal is imminent. Gilmore Associates has assembled 1 million square feet downtown and is going to develop apartments, hotels and theaters for an anticipated clientele of urban professionals.
It all sounds impressive. Yet finance is in short supply. “It’s really hard to get money in these projects,” Hammond says. The long-term permanent financing that insurance companies typically supply to commercial buildings is practically unavailable in the inner city.
State trust funds are being sought to alleviate Southern California’s severe housing shortages. But something more is needed.
The solution should be to tap “the jet stream of the financial markets,” says economist Glenn Yago of the Milken Institute. In a pilot program, the institute has helped California Treasurer Philip Angelides recycle idle capital and create new financing for housing and inner-city investments.
To explain briefly, the state had old loans on its books for housing and small business in inner cities. The loans also had insurance funds attached, which made them super credit-worthy. So it was relatively simple to bundle the insured loans into a security that financial markets would buy--as they buy mortgage-backed paper every day.
The result is that the state gains fresh money to use again for housing and other purposes. The Milken Institute and the city of Los Angeles also are working to securitize loans of community development banks and agencies.
California’s need for housing is acute. In Orange County, Santa Ana, Westminster and other cities need housing. In gold-plated Silicon Valley, leading employers Intel and Hewlett-Packard demanded that public officials do more to create housing for their employees.
So cities are recognizing a need for change in regulations, says Michael Woo, director of the Local Initiatives Support Corp. California will see more mixed-use development--retail stores on the ground floor, with residences on two floors above. Transit will be more available.
In a word, the state’s urban areas will become more urban. And that will allow them to accommodate the population growth that is certain in the coming years--and to thrive. That’s the vision. We should hope it becomes reality.
