Rentals replacing condos
Daria Benedict had been in escrow for nearly a year on a 725-square-foot loft in the Chapman building in downtown Los Angeles when she got the first indication that the rehabilitation of the historic office building into high-end condos might have hit a snag.
The developer of the former Los Angeles Investment Co. building asked for a larger deposit on Benedict’s purchase of a 13th-floor unit that promised an open floor plan and oversized windows. Benedict, who works for NBC’s “Tonight Show,” had to scramble to find the extra cash.
But it hardly mattered. In May, the developers took the Chapman building off the market altogether, returned buyers’ deposits and instead opted to rent out the 168 units.
The Chapman found itself at the front of a rather unenviable trend: In the midst of a downturn in the real estate market, some developers are finding that they no longer can sell condos in buildings that even a year ago would have been quickly snapped up. Flummoxed by a precipitous drop in qualified buyers, they are choosing to rent out their buildings instead.
It’s happening in downtown Los Angeles, and to a lesser degree in Hollywood and the San Fernando Valley -- areas where high-density housing has sprung up in recent years.
And the shift raises questions about some of the fundamental assumptions surrounding urban development. Instead of buyers who can afford the hefty down payments and mortgages, some of these developments are now attracting renters who need only put down rents of $1,500 to $4,500 a month.
But is the shift in the market a bad thing for L.A.? There’s some debate on this point.
Jan Lin, a professor of sociology at Occidental College, said the change is “something that you should be a little cautious about if you are a planner or city official concerned about the social fabric.”
Property owners are typically more invested in their neighborhoods and push for urban transformation that will better the neighborhood and increase their equity.
But the owners of rental buildings are usually absentee owners, not residents of the area in which they are invested, Lin said, and don’t necessarily have the same dedication to bettering the neighborhood that condo owners often do.
Many urban revival efforts have begun with homeowners moving into distressed neighborhoods and slowly fixing up houses block by block. Over time, the change spreads to nearby shopping districts as well.
This has happened over the years in neighborhoods around Los Angeles, including the West Adams area, where Victorian houses have been restored, and Echo Park, Eagle Rock and Highland Park.
But the revitalization of downtown was sparked much less by homeowners, said developer Tom Gilmore, whose conversion of old bank buildings along Main Street into rental lofts nearly a decade ago helped spark the revival.
It was renters -- a mix of artists, young couples looking for urban adventure and professionals who worked downtown -- who began to build the loft scene that eventually led to new restaurants, bars and galleries, as well as luxury condos.
Gilmore said downtown needs a mix of renters and owners.
With renters, “their tenancy is shorter, their horizon is shorter,” he said. “The dark side of condo owners is that many are part-time residents. Those rentals are uniformly used on a daily basis. You actually get more buy-in on a community level because there are more people using the streets every single day.”
Downtown condo owners in L.A. and elsewhere often see the property as an investment rather than as a place to live and build a community.
“I saw it in New York; you can see it in London,” Gilmore said. “You can have a completely filled condo building and not have anyone living there on a daily basis.”
Gail Goldberg, director of the city’s Planning Department, believes that there should be little alarm at the rental conversions.
She said that it is important for cities to provide a mix of rental and for-sale housing, and that an increase in the number of rentals in Los Angeles could end up changing some long-held habitation patterns.
“We have to come to terms with the fact that in California . . . we are going to have a need for a lot of rental” [housing], she said.
“Rental [housing] in other parts of the country is seen as more of a long-term living choice. People live for long times in rentals in New York and other eastern cities, and make it a permanent home. We still here in California have this slight sort of edge about rental[s] -- that it’s too transient, that people don’t invest the same. I am not exactly sure that’s true.”
Projects that recently converted from condo to rental include Larchmont Lofts, Universal Lofts, the Brockman, 1010 Wilshire and Artisan on Second downtown. Experts say that they expect to see more of the reversions in the coming months.
Mike Farzan, one of the Chapman’s co-developers, said that the decision for his building to go rental was something that was precipitated when some buyers had lost their jobs, and others watched loan commitments slip away as mortgage lenders changed guidelines.
“Faced with the uncertainty,” he said, “we decided to go rental, at least for a few years, until things settle down.”
Some residential condo projects are moving forward despite the changes in market conditions.
Gilmore said the units in the Rowan project he is working on will still be condo when they open in the coming months.
And, on Wednesday, workers hoisted three final steel beams to the top of the 54-story, hotel-residential tower that is part of the L.A. Live complex in the South Park area of downtown in a symbolic “topping-off” ceremony.
Condos in the L.A. Live project, which will share amenities with the Ritz Carlton hotel in the tower, start at $1.4 million and climb from there. Officials with AEG, which is developing the project, said that a few buyers have dropped out but the rest have renewed their commitment to the project and have put 20% down.
Of course, many downtown condos are aimed at a less-wealthy demographic. And given the economic uncertainty and falling home values, some residents who once thought of buying downtown are happy to be renting for now.
As for Benedict, she continues to live at the Douglas building, a few blocks north of the Roosevelt.
She said she has adopted a pragmatic take on her real estate fortune -- one tied in part to downtown’s changing fortunes as a residential neighborhood.
“In the long run, I think it saved me,” she said. “I would have purchased that home for over market value. Even though I thought it was a great deal, downtown is a long-term investment thing. You have to invest and hope that it’s like Manhattan.”