'We Had No Bad Years': The CRE Trends That Defined LA This Decade
After a brutal recession, the Los Angeles commercial real estate landscape met the new decade head on — and flourished.
Led by a strong local economy and low unemployment rate, most commercial sectors in the city and region performed well.
The office markets in Culver City, Century City, Santa Monica, Silicon Beach and Downtown Los Angeles blossomed as tech and professional services firms moved in. Vacancy rates in the Los Angeles office market have gone from a high of 12% in 2010 to 10.4% during the third quarter of 2019, according to data from Kidder Mathews.
LA County's industrial vacancy rate went from 5.5% in 2010 to 2.3% ending the third quarter of 2019, according to NAI Capital.
Fueled by a growing population and a severe housing shortage, LA's multifamily industry saw a rise of new construction, as well as booming absorption throughout the decade. In the past 10 years, rent soared and the vacancy rate dropped from 5% to 3.8%, according to Kidder Mathews.
Even retail, despite the closing of big-box department stores, performed well. Kidder Mathews data found the retail vacancy rate of 5.9% in 2009 has fallen to 4.5% at the end of the third quarter of 2019, according to Colliers International data.
And no greater area saw as much change than Downtown Los Angeles. The number of hotels, office buildings and residential projects all rose throughout the decade.
Bisnow caught up with several experts in the Los Angeles commercial real estate market about the trends that shaped our CRE landscape during the decade.
ON RETAIL:
JLL Executive Vice President Shauna Mattis
Bisnow: What's your general overview of the Los Angeles retail market over the past 10 years?
Mattis: It was volatile. Things have fundamentally changed. The way consumers shopped have changed. People are more focused now on value and experience. Discount stores such as Ross, Marshall's, TJ Maxx and Burlington are experiencing success because customers can find value in the merchandise and still get brand quality. Prior to this decade, they would be shopping at Sears and JC Penney department stores.
Dollar Tree is another good example of a successful brand because of value-conscious consumerism.
Another thing is experience. You saw a lot of concepts in the food and beverage offering a variety of different food concepts. Farm-to-table concepts ignited a lot of trends. The type of experience that is being provided to consumers is becoming super important for how they shop and where they choose to spend their money.
Bisnow: What were the trends that drove the retail industry this past decade?
Mattis: Aside from the value, fitness and entertainment, more and more retailers are offering their products online, which wasn't the case more than a decade ago. There were very few offerings to go online and you were forced to go out and shop at brick-and-mortars.
As technology evolved and the opportunity to shop online became easier and more consumer-friendly, brick-and-mortar has evolved into what you need to experience. You can't work out online. You can't go out to dinner online. You have to go to the facilities. Those experiences where you are engaging in the facility itself is what is becoming important to the consumers. You saw a lot of landlords add a lot of amenities to their retail project that extended dwell time. How do you keep the consumer on the property to take advantage of the offerings that are available?
As for the "retail apocalypse," that was a term created for headlines and shock value. Not to dismiss the fact that there are stores that operated here and no longer exist today [but] it's not so much an apocalypse as an evolution. The stores that are opening up are smaller in nature. You may lose a JC Penney and Sears, but you gain a Warby Parker or other store that uses a smaller footprint.
For regional malls, retail was a bit overdeveloped. All of the malls in core markets with good balance are still thriving [such as] Westfield Century City and Beverly Center and Beverly Connection. The Westside Pavilion is evolving into a non-retail with Google coming in. Malls flipped into two categories — there's the ones in good core markets with strong demand, and then there's the malls that are redundant and not compelling enough. The malls that aren't evolving or growing need to change what they look like.
Bisnow: What are some of the tenants that made a mark this decade in Los Angeles?
Mattis: You saw a lot of celebrity chefs opened up and expanding their creative side. You saw a lot of entertainment especially technology. Technology influenced retail. There's a lot of e-gaming and gaming arenas. It's going to be fun to see how that evolves.
ON MULTIFAMILY:
TruAmerica CEO and President Bob Hart
Bisnow: How did the multifamily landscape change in Los Angeles after the recession?
Hart: It's been pretty great since 2009. We've come out of a corrective cycle that was very deep and very far-reaching stronger than we ever have. One of the reasons is pure rental demand and a lack of new construction for several years following that cycle. From 2008 to 2011, there were hardly any new apartments. When you overlay that with the [thousands of people] in need [of housing] and Los Angeles having a homeownership rate of 20% and being an expensive West Coast blue state to live in with high taxes, affordable apartments were off the charts in terms of demand. That pushed up rents in an environment that was supply constrained and favoring landlords.
We had high job growth and more in-migration than out-migration. A lot of workforce demands.
Bisnow: What were the trends that drove the multifamily industry in Los Angeles this decade?
Hart: On the value-add side, owners saw the opportunity to buy and improve apartments because they could get the higher rents. There was a lot of demand and stability and income opportunities.
On the development side, it was just pure demographic demand. Places like Downtown Los Angeles, where they are building basically a second city, you had the zoning working for you and building density. You saw a lot of micro-units in Santa Monica and downtown, where they were building smaller units to make rents affordable.
Affordability is the key to making the whole thing work.
Bisnow: Looking back, when did you know that the recession was over and that your sector was going to be OK? Was there a single moment, or a major transaction or deal? What happened that led you to believe the economy was going to be on this kind of an upward swing?
Hart: For me, June 1, 2013. That's when I left Kennedy Wilson and formed TruAmerica. I burnt all the boats behind me. I started writing my own big checks and started my own platform. That was the day for me. I saw this opportunity and I felt I needed to do it in a committed way.
I think once we got through the recession and major corporations started realizing that we weren't going to sink into a depression, I think the confidence was gradually resuming, but it took people a while to get their investor confidence up. By 2011, people were getting their confidence up. But those who were supremely confident were buying up property in 2009 and 2010 and that has built momentum. Every year has gotten better and better. We had no bad years.
ON DOWNTOWN LOS ANGELES:
Downtown Center Business Improvement District Executive Director Nick Griffin
No other place in Los Angeles has grown as much as Downtown LA in the 2010s.
According to the Downtown Center BID, 10 new hotels were built totaling 3,514 rooms, while four hotels underwent renovations and upgrades to add an additional 1,130 rooms.
There were at least 64 new multifamily projects totaling 18,115 units completed in this decade, including the recently completed Metropolis project. Of the 18,115 completed units, 15,854 were for market-rate rentals, 897 for condos and 1,364 were dedicated for affordable housing.
In the office sector, 24 properties totaling 1.9M SF of office space were built between 2010 and 2019, according to DCBID citing CoStar records.
The BID estimates for downtown's retail, about 2M SF of retail was either developed or overhauled, including FIGat7th and The Bloc, which represented about a third of the total.
Bisnow: What were the trends that drove the growth of Downtown LA this decade?
Griffin: Multifamily was the driving factor. It’s been both what’s driven the growth and what has made downtown a truly 24/7 live-work,-play city. We added tens of thousands of new people. Those people are on the street. They are the ones who are shopping, working and going to the bars and restaurants.
That residential growth has fueled the viability and strength of all of the other commercial real estate sectors.
One of the most compelling things that we have seen in the last five years is a diversification of the office sector. There is a much broader range of companies and in a broader range of industries [like] tech, media, fashion, design, architecture, all of these industries are redefining your father’s downtown.
What's compelling about that is seeing the parallel between the growth of the residential sectors and this diversification of the office. They go hand and hand.
On the office side, over the last decade you have seen an incredible infusion of new capital buying up the existing Class-A office towers. Almost every one of the Class-A office towers has new ownership in the last 10 or so years. Those folks are bringing new capital and upgrading their properties significantly, and they are repositioning them for this new era of city living and for this new generation of tenants.
There was also an increase in international and institutional investments. You saw a large number of Chinese investments with the Metropolis and Oceanwide. Onni, a Canadian company, have been incredibly active and are continuing their investments. Brookfield, also a Canadian company, not only owns half a dozen Class-A office towers, but has doubled down an expansion into residential and other commercial property types.
We also saw a broadening of investments in neighborhoods in downtown [like] South Park, Arts District, Fashion District, Financial District. It’s really interesting to see each one of these areas seeing significant investments.
Bisnow: If there is one word that defined your sector this past decade, what would it be?
Griffin: Renaissance. What we saw in this decade was that all of the sectors began to flourish like the Renaissance. It created a burst of creative dynamic energy which really fueled all of the sectors going forward.
Bisnow: Along with the growth and success of Downtown, the area is also grappling with a growing homeless issue. Can you discuss that?
Griffin: My personal opinion is that we have hit bottom on this and that's when change tends to happen. You saw the passing of Prop. HHH [$1.2B bond measure that supports housing the homeless] and Measure H [which provides homeless services].
There is a lot of political will not only from elected officials but also the community. This is the top priority for the city and region.
While we have been at the forefront of the problem, this is not a new problem for downtown. Other communities need to pitch in and contribute. We have been in the forefront of the solution and we’ll continue to lead to find solutions to this problem.
ON THE LENDING MARKET:
Mesa West Capital co-founder and principal Jeff Friedman
Bisnow: What's your general overview of the Los Angeles lending market over the past 10 years?
Friedman: We started the company in 2004 and we are one of the few firms that survived the financial crisis. There were 80-plus competitors when we began. There was a lot of liquidity in the market, but when the global financial crisis hit, there was a credit freeze.
We were still active in 2009 and 2010 coming out of the market. There were very few lenders in the market and we could name our terms. It was a fantastic time to be a lender.
We compete with big commercial and investment banks but they were more or less shut down from commercial real estate lending. That provided wonderful opportunity for us to make loans.
Since then, our market, post-global financial crisis compared to pre-global financial crisis, the opportunity has expanded in an extraordinary manner.
A lot of the large commercial banks were wiped out [including] Lehman Brothers, Wachovia, Bear Stearns, Countrywide, Anglo Irish Banks and RBS. They were not only large banks but the most aggressive. Additionally, the ones that are remaining are heavily regulated.
We've greatly benefited from that.
Bisnow: What were the trends that drove the lending industry in Los Angeles this decade?
Friedman: Primarily, office and multifamily with a smattering of retail. We don’t do construction financing. Right after the financial crisis, we made two loans on storefronts on Rodeo Drive, where the Tom Ford is and where the Bally’s is.
Normally, that is a loan a commercial bank would make, but because of the lack of competition from the banks, it was a $150M loan and we were able to make that. That was a sign of the times.
We made loans for 444 Flower for Hines. The Murdock building for Tishman Speyer. The large Lantana Project in Santa Monica for Artisan. We made loans in Playa Vista and the Pointe in Burbank.
We've been originating loans for trophy real estate for fantastic sponsors and that just shows the market opportunity that was created. Before the financial crisis, it would have gone to a commercial bank.
Bisnow: If there is one word or thing that defined your sector this past decade, what would it be?
Friedman: The global financial crisis created our market opportunity. For many people, the global financial crisis crushed a lot of property owners and a lot of big institutional investors and lenders, [but] for us, it created the market opportunity.
ON INDUSTRIAL:
Dedeaux Properties President Brett Dedeaux
Bisnow: What was the industrial sector like in Los Angeles at the end of the last decade?
Dedeaux: At 2008, 2009 and 2010, we were coming out of a recession, and at that point, values were depressed. There were a lot of vacancies and we were waiting for the market to recover to build more projects. The ones we had built, we were trying to get those leased because there was a lot more competition and the market slowed.
But it also showed me the strength of the Southern California market. Vacancy did not go over 5% in the prime infill LA County submarkets. The Inland Empire had higher vacancy than that because of the [amount] of construction and development.
The market stayed fairly steady in a recessionary period. It didn't get hammered that hard. That's why we focused on a Southern California/California strategy because of the diverse economy, with the ports being here and [at that time] trade with China [was strong] and the big population here.
Bisnow: What were the trends that drove the industrial market this decade?
Dedeaux: It's easy to say e-commerce. But it’s not all e-commerce. Industrial was strong and healthy prior to e-commerce and it would have stayed healthy.
It just gave it the boost or turbo-charged an already healthy sector, where it got more visibility and even more growth.
Most of us, we realized that e-commerce was going to have an effect, and it did, but beyond e-commerce, there's just a change in the buying trend of consumers whether it's being delivered straight to the store or their homes.
This is all driven by the consumers. They got more acclimated to ordering online.
Prior to 2010, the typical consumer had ingrained shopping habits of going to the shopping center. The younger generation of buyers then grew up and grew accustomed to ordering online and became more of the mainstream buyer.
We're seeing a lot of demand cold storage to feed their food habits, whether it's delivering groceries to their doors or meal kits. These companies are growing quite a bit.
ON OFFICE:
Savills Vice Chairman Mike Catalano
Bisnow: What's your general overview of the Los Angeles office sector in the past 10 years?
Catalano: The first thing that comes to mind is it feels like a never-ending cycle, and because of the vibrant Los Angeles economy, rental rates continue to climb.
Santa Monica, Culver City, the Arts District, Century City and Hollywood have all been markets that have increased at a rate that's been higher than the general Los Angeles market.
Bisnow: What were some of the trends that drove the office industry?
Catalano: The biggest factors are that we have not added a tremendous amount of inventory in the last 20 years, and that most of the inventory that has been added, have been conversions and creative office space. Because of that, the demand has outpaced the new supply.
Some of the biggest tenant drivers were media, technology and entertainment and the overlap of those industries. Hulu and Netflix are good examples of tenants that are in the entertainment, media and tech space. (Netflix, for example, has grown and takes up at least 1.6M SF of office space in Los Angeles.)
For professional services firms, West Los Angeles and Downtown Los Angeles have also done well servicing those industries. Law firms, accounting firms and other professional services are taking up more space, because they are servicing industries that have grown in the last 10 years.
To offset [that], some companies have also worked hard to be more efficient in their spaces, [so] you see smaller and more communal spaces.
Bisnow: When did you know that the Los Angeles office market was going to be OK after the global financial crisis?
Catalano: I would say it seemed to coincide with the resurgence of the Downtown Los Angeles market and the Hollywood market. These were two rundown areas 15 years ago, and what's happened in those two markets has been absolutely astounding with respect to amenities. The revitalization of those two markets pulled this economy out of the recession.
ON ARCHITECTURE:
Perkins and Will Project Designer Jorge Enrique Mutis
Bisnow: What were some of the hot design trends in the 2010s?
Mutis: One thing that has been specific is experience and the use of space. Experience is everything nowadays. You no longer go to a place just because you are getting a service provided. You are going to a place because you cannot get it anywhere else.
Experience is definitely the highlight of a trending market and design needed to respond to that trending market.
In our decade, the internet became physical. You no longer needed to get out of the comfort of your home. Retail spaces needed to curate an experience that would drive you out of your comfort zone. You are no longer buying shoes but the experience of buying them.
With food, food and beverage businesses curated unique experiences. Office buildings had bigger windows and glass to put in more natural light. One thing we kept hearing is that it is no longer about open space, but we have to curate the work experience in a way that is customizable. The workplace needed to be as comfortable as home so that you feel the need to fill a desire to come to work.
Bisnow: If there is one word that defined your sector this past decade, what would it be?
Mutis: Curate. [Curate] unique experiences. The idea of memory has been associated with a successful building or successful space. The idea of memory, the saturation of information, if you are able to plant a memory or experience with the design of the space.
There is ... so much competition as an architect. If you don’t create a memory or memorable moment for a user, you have a missed opportunity.
