November 28, 2018
By Dennis Kaiser
Connect Westside Los Angeles featured a market outlook from Real Capital Analytics’ commercial real estate economist Jim Costello, as well as three deep-dive panels that covered key trends and market activity. The conference was held on Nov. 27th at the Luxe Sunset and drew more than 300 attendees. Today, we’ll share a few highlights from the day’s conversations. Look for recaps of each panel in the coming days.
Westside LA Power Players
Movers and shakers on the evolution and expansion of the Westside shared some of the drivers fueling one of the hottest submarkets in the country. The panel (pictured above), which was moderated by Greenberg Glusker’s Ken Fields, discussed where deals can be found, as well as what tenant demand looks like today.
CBRE’s Jeff Pion noted the Westside is one of the most robust economies in the world. An emerging trend he sees is “agile workspaces,” which reflect the collaborative way people work today. He notes the importance of people being together hasn’t changed, but he’s seeing a “blend of live, work, play” environments emerge. Pion says, people want a different workspace that has a ‘story’ and “inspires them when they show up to work each day.”
Boston Properties’ Jon Lange pointed out the Westside growth is spilling over into other submarkets, such as El Segundo, which could emerge as the next big expansion market. He also noted location decisions have shifted from considering sites near where the CEO lives to where employees live. Companies have realized that for long-term growth and stability “they need to be where their intellectual capital lives,” he says.
Lincoln Property Company’s Kent Handleman agreed that companies know they will have to hire the best talent, which means companies must create an environment that works for employees. Rent is less of a factor now, but offering a workplace that helps companies recruit and retain people is critical today, he notes.
Tishman Speyer’s John Ollen believes those who got in at a low cost basis on the land with a long-term hold approach are in a position to have a winning strategy. He notes the ability to “create scale” in today’s workspace is vital, though that requires introducing spaces that are “interesting and unique for companies.” That might also mean revisiting overlooked spaces such as balconies to create value.
Eastdil Secured’s Stephen Somer notes in a tight market there could be some opportunities for smaller assets that may fall under the radar of larger institutional capital players or foreign buyers. Though it is still “pretty competitive” for big and small deals, he says.
Outlook with RCA’s Jim Costello
Real Capital Analytics’ Jim Costello delivered an outlook that touched on the prospect of a recession, interest rate changes, deal volume and pricing. He pointed out that the decline in property prices is not necessarily a reflection of a pending recession. Economic downturns are caused by imbalances or inefficiencies in the market, and Costello says he’s not seeing issues on that front.
The big question he hears consistently is when cap rates will rise and by how much. He notes there hasn’t been much movement on cap rates so far, though wonders if it could be the calm before the storm. Rates have remained flat though the third quarter and volatility has emerged in the fourth quarter. He says a sense that something has changed is in the air, as reflected by some buyer caution lately. Though Costello points out, that doesn’t necessarily mean cap rates will move up. A possibility exists for a hung market to emerge if interest rates go up. Though if owners can refinance, they may elect not to sell, he says.
The current market is experiencing more entity-level deals compared to previous cycles. Costello notes historically entity-level deals accounted for roughly 28% of deal volume, and the market is above that now.
Compared to previous markets, Costello is seeing different motivations in place today. What he is seeing is fewer arbitrage deals in a hot market, and more reinvestment in capex, which reflects the long term play by owners.
On the pricing front, Costello notes some believe the market should be experiencing declines by now from record high CRE prices. But, we’re still seeing growth not declines, he says, though there are a number of pricing tends in this cycle compared to the last one. One thing Costello sees different in this market is the way debt is being used. The last market was all debt-driven, and it is not as advanced in this cycle.
Climate Change: Spotlight on Rising Construction Costs, Interest Rates and Inflation
Front-line CRE leaders shared how the industry is addressing concerns such as rising construction rates, higher interest rates and general inflation, as it enters the latter-end of the current cycle. The conversation focused on how the issues have been offset to a degree by strong demand for housing, rising wages, and low employment.
Moderator George Smith Partners’ Gary M. Tenzer notes that over the past year we’ve seen rates shoot up 75 basis points and another 25 basis points are expected in a few weeks. He also points out treasuries were up nearly 100 basis points.
Parkview Financial’s Paul Rahimian says they aren’t seeing a slowdown as a result of interest rate increases. The rate bumps may have actually accelerated deals, as developers moved quickly to get project financing locked-in before rates rose more.
Madison Realty Capital’s Bradley Ross agreed they haven’t seen a deal slowdown in West LA. The outlook for the Westside is “very good from a supply and demand basis,” which is being driven by tech and entertainment. Demand is strong, supply is constrained and there’s job growth, he says.
Deutsche Bank’s Mark Fluent says on the permanent debt side, there’s a sense that rates are going up so a few more refinancings are getting done earlier than expected. Borrowers may feel they need to get it done before they planned to out of a fear that the rate will not be there later, he notes.
Mixed-Use Development: The Evolving Westside
With projects like One Culver, 3rd Street Promenade 3.0, the Culver Steps and Ivy Station, it’s clear that tenants and consumers alike are yearning for more mixed-use spaces to occupy. Industry experts behind the biggest new mixed-use developments on the Westside shared what’s behind some of these big projects.
Moderator Cox, Castle, & Nicholson’s David Waite notes the transit shift away from cars will take some time, though multiple options are emerging and that’s helping to encourage mixed-use development around transit nodes. He pointed out the Expo line’s promise of 4,000 to 6,000 units of housing between Culver City and Santa Monica at full implementation of the plan.
Downtown Santa Monica, Inc.’s Andrea Korb indicated they are reimagining the 3rd Street Promenade to help breathe new life into an area that was created in the 1980s and needs a redo. That plan will focus on addressing the tired downtown Santa Monica area, meeting new challenges from competitors and keeping up with shifts in shopping trends to bring the 40-block area back into relevancy.
Paloma Realty Partners’ Chris Cunningham notes one of the Westside’s ‘cool kid’ corridors, Abbot Kinney, is seeing institutional investor interest now. The key he says, is creating or offering “authenticity.” That element resonates with people, visitors and residents of communities alike. He looks for “project affability” as a key indicator of what venture to pursue next.
Hackman Capital Partners’ Ryan Smith points out the Westside market is tight, and it may be easier to lease a 250,000-square-foot site than a 5,000-square-foot one now. That’s because there may be 30 small space options with 27 tenants seeking space, while there are two large space options with four tenants competing for the space, which means both large block options win.
For comments, questions or concerns, please contact Dennis Kaiser