Will DTLA’s housing development lead to a glut of empty units?

Developers proposed 3,800 new units in Q1, bringing expected total to 29,383: report

May.May 24, 2017 05:00 PM
Downtown L.A., Carol Schatz (Getty Images/DCBID)

Construction sites litter almost every district of Downtown Los Angeles, as Oceanwide Plaza’s towers rise in South Park and Suncal plans its $2 billion 6AM development in the Arts District, which would contain 1,305 condos.

If all proposed and under construction projects are completed, 29,383 new units will hit the market, according to a first quarter market report released by the Downtown Center Business Improvement District (DCBID) on Wednesday

The DCBID defines Downtown L.A. as the area bounded by the 110, 101 and 10 freeways and the L.A. River. The BID includes Chinatown, City West and Exposition Park in its parameters, which sit outside of DTLA proper.

Experts are concerned that demand in greater DTLA will not meet supply. Given that the vast majority of units in the pipeline fall in the luxury category, they worry an oversupply of expensive apartments is imminent. These fears are causing some lenders to be cautious about financing downtown construction projects, experts told The Real Deal in April.

“It is obvious and apparent from all the projects in the pipeline that there will be some period of oversupply,” said Mike Condon Jr. of Cushman & Wakefield. “But, at the same time, investors shouldn’t take a ‘the sky is falling’ approach to these temporary numbers.”

Condo prices averaged $650 a square foot in the first quarter, up 2.8 percent year-over-year from $632.

Apartment asking rents rose to $2.80 a square foot a month, up 3.3 percent year-over-year from $2.71, according to the DCBID.

Trumark Urban’s TEN50, which opened in February, was the first condominium tower to begin selling units since the recession. But there are a lot more on the way. There are 2,770 condo units under construction, according to DCBID’s report. Some of the projects under construction are sizable. Oceanwide would bring in 504 condos, and Metropolis would bring in 1,310.

Meanwhile, the number of rental units continues to skyrocket. Developers proposed 3,200 market rate and 350 affordable units in the first quarter alone.

While demand for housing in Los Angeles at large is expected to remain high, many DTLA developers are currently offering several concessions such as a free month of rent, said Rob McRitchie of JLL.

“The units will be absorbed, but the question is when and at how much,” McRitchie said. “I think [concessions] is a short-term trend. A lot of [developers] do it to get their buildings leased so they can stabilize the asset and sell it – not just because of a market slowdown. But usually, [concessions] is a leading indicator.”

“Developers are saying, ‘let’s slow walk this [and] understand the absorption in the market before we double down on another project,’” McRitchie added. “But I think long term values are pretty rosy.”

Just like the hordes of residential units, a glut of office space will also hit downtown.

An estimated 3.2 million square feet of office space is currently under construction, and an additional 2.8 million was proposed in the first quarter, according to DCBID.

Meanwhile, the office market saw less absorption than it did in the previous quarter. It saw 36,566 square feet of positive net absorption, down from 140,067 square feet in the first quarter of 2016, according the DCBID’s report.

Erik Kenas of Cushman & Wakefield said net absorption has showed signs of flattening but is still positive, according to the firm’s independent research.

“Vacancy rates Downtown will rise slightly as key office products deliver throughout the year,” Kenas said.

Vacancy rates have traditionally held between the mid-high teens and low to mid-twenties for the CBD (Financial District/ Bunker Hill), he said.

The office market across Downtown saw vacancy drop to 16.5 percent in the first quarter, compared to 17.2 percent in first quarter of 2016, thanks to new leases signed by firms such as LA Health Care Plan, Analysis Group and U.S. Census Bureau, according to the DCBID.

Class A office rent climbed to $3.40 a square foot, compared to $3.22 in Q1 of 2016. Overall rents were $3.33, up from $3.20 in the same period last year.

Vacancy rate was up slightly to 4.6 percent in the first quarter, compared to 4.3 percent the same quarter last year. The increased vacancy did not slow the rise of asking rents, however. They crept up to $2.63 a square foot in the quarter from $2.54, according to the report.

Downtown saw 109,342 square feet of retail net absorption, up from a negative net absorption of 55,737 square feet in the first quarter of 2016.

Boosting the retail offerings in Downtown has been an ongoing struggle for the area – take Ratkovich’s the Bloc, a 1.8-million-square-foot mixed-use development that has seen previously announced tenants drop out amid construction delays and broker change-ups.

But some, such as DCBID CEO Carol Schatz, point to the addition of new hip tenants such as Blu Jam Café and Kai Japanese Roots as signs of improvement.

“The DTLA retail market has matured significantly,” she said.

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