Commercial development anywhere in Los Angeles is an expensive--and lately, a risky--proposition. Nowhere is that more true than in the downtown area, where new construction fees and a predicted oversupply of office space are prompting some builders to think twice before committing themselves to a project.
Two new factors surfaced last week will likely add to the malaise: Talk of more city development fees and a study released by Salomon Brothers suggesting that L.A.'s office market is on shaky ground.
The city Department of Transportation presented its proposal last Monday for a new traffic mitigation fee in the Central Business District, just east of the Harbor Freeway.
Besides assessing development fees for ride sharing, peripheral parking and Metro Rail, DOT suggests a fee that would generate city revenues of as much as $16,500 for every rush-hour driver generated by a new project.
That means, for example, that if Tower X adds another 1,000 cars to the road between, say, 5 p.m. and 6 p.m., the developer can expect to pay the city $16.5 million in so-called TRIP (Traffic Reduction/Improvement Program) fees.
Needless to say, developers will not be happy about the new proposal. They're already complaining about the costs of acquiring air rights, building off-site parking structures and shuttling employees by bus, a 1% fee for public art and a public park fee for builders active south of 8th Street. Add to that a more than two-year approval process with the Community Redevelopment Agency.
All these fees "could have a chilling effect on downtown developers," said O'Malley M. Miller, a real estate attorney at Allen, Matkins, Leck, Gamble & Mallory.
By the time he explains to developers all the fees and timetables they have to comply with, he says, "they look at me like I'm from Mars."
But as much as developers and their lawyers like to complain, countered Gerry Hertzberg, chief legislative deputy to Councilwoman Gloria Molina, "they'll survive." Developers pay relatively little money to the city for the right to build, he says. And as far as mitigating traffic, "I'm flabbergasted that they've gotten off scot-free."
Molina is backing the TRIP fee proposal, and as chairwoman of the council's Community Redevelopment and Housing committee, her position may set the tone for how the rest of her colleagues vote.
Molina has scheduled an April 16 hearing on the topic, and she hopes to win approval for an interim TRIP fee ordinance while a more permanent one is studied and completed.
The only part of Los Angeles that has a final ordinance for TRIP fees in place is Playa Vista, a mixed-use development planned by Maguire Thomas Partners near Los Angeles International Airport.
Areas such as Ventura Boulevard in the San Fernando Valley and Westwood Village have such fees as well, but they haven't been finalized.
Central City West--which is downtown west of the Harbor Freeway--will likely be subject to a TRIP fee identical to the one proposed for the Central Business District west of the Harbor Freeway. The two areas are distinguished by different plans and a different oversight process by the city.
Since the fees are a relatively new concept, this is something that needs to be studied," says attorney Miller. L.A.'s DOT, eager for new revenue, however, said it wants the fees "implemented as soon as possible."
All this comes on the heels of a report by the investment banking house of Salomon Brothers that adds yet another voice to the uneasy sentiment over the Los Angeles commercial scene.
Office space currently under construction is about to create an oversupply downtown and a vacancy rate of 25% by the fall of next year, predicts the study, entitled "Los Angeles Real Estate Market II: Is the Ground Shifting?"
Similar vacancy rate increases are projected for the Westside, San Fernando Valley and San Gabriel Valley.
"We see less upside potential for Los Angeles," says David Shulman, director of real estate research for Salomon Brothers in New York. "I would be more cautious in my investments today than three years ago, when we were more bullish."
Problems are abundant. The high school drop-out rate within the Los Angeles Unified School District was 39% for the class of 1988, compared to a U.S. average of 29%. Add to that drugs, gangs, prohibitive housing costs and lack of infrastructure, Shulman said, and you've got a shaky economic base.
"Be cautious," he advises. L.A.'s high real estate prices assume smooth economic sailing and relatively slow growth. As immigrants make up a larger share of the population, however, Shulman and his research partner Sandon J. Goldberg predict that the slow-growth movement may lose some of its momentum.
Fewer growth restrictions, they reason, will mean that some of the artificial limits on supply of commercial and residential space could be lifted, and more supply means lower prices.
This doesn't mean it's time to pack up and move, though, says Los Angeles expatriate Shulman. "We are cautiously optimistic."