Capital Markets Say to Play the Waiting Game

I agree with most of these points and consider them valid and factual based on my own research. I do question however, a 40-50% decline in values over the next 12-24 months. I don't foresee THIS steep of a decline following an already established correction.

The major problem for me: Sellers will attempt to exploit the "timing" metaphor in all manner of advertising and promotion. Wading through all of the BS and attempting to find real value, therein lies the difficulty.

Preaching to the choir Fred;-)

I believe it's 40% to 50% off peak, not just in the next 12 - 24 months.

Thanks to blogdowntown for this article. As much as I want downtown to succeed, I appreciate that this site (it's no longer just a blog, is it) provides numerous perspectives. Looking forward to your coverage of Anime Expo.

Glad to see some expert input on this issue. For some time I've been wondering about the mechanics of the market driving down prices from their ridiculous speculative levels. It is nice to see it spelled out here. I wonder how this will play out socially in the various residential neighborhoods.

What are your thoughts on EVO? I've been looking at these condos for quite some time now and prices are now around 2003 prices. Wouldn't that be a good investment?

Southparkrenter: I've heard that Evo has surpassed the 50% sold/reserved threshold, which will further open up more funding sources for buyers financing with a conventional (i.e. Fannie/Freddie guaranteed) loan. They have been on an aggressive push to get past this point to pay down their construction loan. Once that's paid off, I would expect its owners to firm up prices. The game is not about making money - its about getting back their original principal. Bottom line - if you're ready to buy, go in, be aggressive and see if you can't cut a deal.

UrbanJungle: Thanks for your advice. So that salesperson wasn't lying when he told me that they were 51% sold. I'm glad that it's a consistent message. I've also been looking at Concerto, but I think I'd be better off with EVO, especially after this article plus their constuction work is nothing like EVO. I'm sure they cut corners on their construction, especially during these times. I'd hate to make a wrong move especially when it's my first time buying.

I visited EVO a month ago and they said they were approaching the 51% threshold.

Did they tell you those HOAs which are discounted now, go back up in January. Factor that in.

where were the naysayers who said that EVO will never sell...it's now passed the 50% treshold and thus, lots of buyers already moved in and enjoy their nice new homes.

IMO, the market for downtown lofts and condos is naturally limited as it's still a family-unfriendly locale. But then, I guess NYC and SF and kind of family-unfriendly, too, and that hasn't stopped their housing price acceleration.

Los Angeles has been an oddity among the leading cities of the world in that the amount of higher-quality housing located throughout its urban center has been fairly limited or, in some ways, almost non-existent. Even a second-tier city like San Diego has developed a volume of market-rate housing in its downtown that places it second in California only to San Francisco, and therefore clearly above Los Angeles.

If the city of Angels can't break out of its traditional, self-limiting mold, then it will continue to have characteristics more in keeping with one of those struggling, sub-standard urban areas of the American midwest or south.

Despite the large population, L.A. definitely feels like a struggling, sub-standard urban area of the midwest. It seems like we can't get anything right. If anything is done by the city, it's practically guaranteed to be crap. Is it just me?

I'm new to LA and just moved downtown from Phoenix AZ -- the 5th biggest city in the US -- and I have to say that you guys are actually fortunate to have a downtown like you do so you shouldn't complain.

I mean the diversity is unbeatable. You have Chinatown, Little Tokyo, El Pueblo, the Fashion District, South Park and Koreatown all within your central city. On top of that, Hollywood is only 5 miles away. There is absolutely nothing like that in San Diego or Phoenix. And it always seems to be fairly busy to me, or it seems like more busy than I was expecting. You guys shouldn't be trying to over gentrify this city and instead embrace the diversity cause it really is unique from almost all other major cities in the US.

The only complaint I have is that it seems like a lot of people who live in my building seem like they think theyre too good to actually walk around downtown or something. I mean my building is full of white people and yet I never see white people walking around downtown. Do they just live in downtown but go hang out in other parts of the city? It just seems odd to me. I always thought the main attraction to living downtown was so you wouldn't need a car and could walk to everywhere you needed to go.

"I mean my building is full of white people and yet I never see white people walking around downtown." Have you been to the old bank district/historic core? I've observed other white people congregating in those areas. LOL.

Hahaha, yes, everybody drives everywhere (except during the artwalk) and nobody talks to anybody (unles they're drunk) and everybody takes evrything too serious and personally.

It will take us an entire decade to get to know each other but I believe that it will eventually get there, where we'll have that little town vibe...

Evos a great building, but a FYI, only 40ish have been actually closed.

Thats of 301 I believe.

ankur, i think that you're incorrect...EVO has to be over 50% sold because buildings are not allowed to move people in unless they get to the 50% treshold, and EVO has a lot of buyers who have now moved in and been living there for a few months now.

There is also a difference in investing in downtown and purchasing a home in downtown. You should be looking for a long term solution for your investment as well as for your home. I disagree with a general statement that we will experience a 20%, 30% or even 50% decline in value. That would depend on the building and the unit you are purchasing. Many of the loft buildings are holding their values - like the Eastern Columbia. My unit is worth more today than what I paid for it in 2007 based on recent comparable sales in the building.

If you are ready to buy something now and want to look at purchasing and living downtown, now is a great time. We are at the negotiable bottom on most places and there are tax incentives to purchasing now as well! Working with an experienced REALTOR is key! We know the ins and outs of all of the buildings and developments and can assist you in making the best purchase for you and your family. Bill Cooper

OMG. Are you serious. Prices are already starting to go up in Downtown. You need to be very careful who you listen to. No one knows better than a local agent. You have to look the local market. No general terms apply to downtown. If you talk to a local agent, they will give you the best advice. Try an agent with http://www.DowntownRealEstate.LA

While it’s true that the capital markets seem to be indicating they are starting to thaw — stocks have risen some 30+% since the March 9th low of 6500 for the Dow (see the Federal Reserve report linked below for more) — the unfortunate truth is that job losses are continuing, foreclosures are rising, consumer spending continues to be restricted, and banks are still not lending.

Please give me specific examples of this. This is not true. Lending is getting easier based on ALL OF MY CLIENTS. Job losses are going to be mainly government jobs that are incomes under $50,000. These usually aren't home buyers anyway. We have run out of good short sales and foreclosures in Downtown. Did this guy even check the charts! The BANK ARE LENDING. This guy is sitting in some office chair and is NOT out on the streets of Downtown Los Angeles.

"Concerto, Muerelo's 717 W 9th Street, The Brockman, The Roosevelt Lofts, etc are simply victims of lousy timing."

First off, the better question is, "Are these good investments at even low prices?" Become my client and I'll tell you what I really think. Let me put it this way, even at the best times to show properties, I didn't one of my clients into the XXXXXXX ONCE! I previewed the building, I looked at pricing, etc., and I decided that I wouldn't put any of my clients in select buildings in Downtown. There are AWESOME investments to consider, but there is also another long list I wouldn't sell to my worst enemy. I have a few more reserved opinions about select Downtown properties that I only share with my clients. If you choose WISELY, you will be fine. The question you should be asking yourself is, "How do I choose wisely?" http://www.DowntownRealEstate.LA

Thank you for your thoughts, Fred. I can't comment on the capital markets, but I can comment on the activity downtown. This is a great time to buy. I disagree in the idea that one should continue to wait thinking prices will drop 30-40%. The only properties available at this dire prediction will be foreclosures. The number of foreclosures in DT have reduced, as well as the short sales, due in part to the banks finally paying attention and being mandated to do loan modifications. This actually keeps current homeowners in their homes and/or investments preventing them from going into foreclosures or having to sell in a short sale. Additionally, there are some buildings that had a number of foreclosures and short sales, and many buildings that have had one or two. Those buildings that had a lot of foreclosures and short sales initially, have really diminished. In my opinion, the market is stabilizing. Since the beginning of 2009, the downtown market has definitely had an upswing compared to 2007 and 2008. Yes, many of the large projects got shelved and/or derailed but that's due to their financing, which as we all know, is quite different from the average homebuyer financing a home. There are many buyers who are grabbing great deals and I believe this trend will continue.

Another factor in waiting is the interest rate. Interest rates are moving up - so do we wait for a property to reduce $10,000, $20,000, $30,000 and pay a higher interest rate, or do we purchase now at a great purchase price with a relatively low interest rate and reap the stimulus tax benefits?

I just sold a unit yesterday at Evo. The purchase price was less that $400psf and they gave my client a credit to apply to closing costs. This is a brand new project, and a project that was built to excellence. I was also told that they reached their 50% mark last weekend. While I was there both over the weekend and yesterday, they were packed with buyers. It is a standard transaction and my client will be moving into the building in 30 days or less.

Although I respect Mr. Cordova's opinions and his many years of experience in the capital markets, I don't think you are down on the ground when it comes to the activity of the downtown residential loft market. I'm extremely optimistic about the market and it's based entirely on the number of properties I've sold so far this year and the fact that my phone is ringing off the wall.

Articles like these, while somewhat informative do not provide a real time accurate account of what is happening "on the ground" in the downtown La Market. Over the past few months we have seen a significant increase in activity as our buyers who realize that it is virtually impossible to "time the market" take advantage of unprecedented opportunities in the buildings that we feel comfortable recommending.The perfect storm of developers eager to sell and interest rates at an all time low, allow qualified buyers access to a market they were once priced out of. As long as you are working with a qualified and knowledgeable Downtown Real Estate Consultant, you will be armed with all of the necessary info to jump into this exciting market. Josh Buxbaum La City Lofts

OK. I suppose I should weigh in now on a few of the responses. First off, I thank all for the comments, both supportive, opposing and challenging. Such open exchange helps everyone make better decisions and build collective knowledge. This consilience is what this blog is all about. Here goes: 1. I sold almost and entire City block to Mr. Shy. He was a very good buyer and although certain people may not like his product, he does fill a market demand. There will always be a demand for his product. 2. My resume speaks for itself on both the commercial and residential markets. My life has been about developing creative strategies to take advantage of real estate opportunities. This includes residential of all types. 3. I absolutely agree that you should not purchase a home without a great broker. It's the only way you can match your buyer profile with the right product. There are several who weighed in here on this issue. If you are thinking of buying, give one or all a call and talk to them, but keep in mind that the broker is ultimatley responsible for one thing, the commission. Yes, she/he wants happy customers and will go to great lengths for you, but they do not get paid unless they close a transaction. Hence, keep that in mind and understand that and they will be your best advocate to getting value. 4. I feel that they key message was lost to some. That is: "No matter how well you execute, timing will always trump location or execution". The projects mentioned are simply victims of bad timing. Whether they were well built or are disasters was not the point. The point was that the pricing used to underwrite the development is off by at least 30% and will reach 50% (off peak asking prices) for some properties (NOT ALL) that were the victim of bad timing. Also, and this is very important, lenders will not just blow product out in a lousy market if they do not have to do so. The new change to FASB 157 allows lenders to "kick the can down the road" on mark to market and that is exactly what they will do. That's why so many have converted to rentals. 5. So, don't listen to me. Talk to Bill or Trent (both great brokers). Just know that there will continue to be extreme price pressure for many buildings and better values over the next 12-24 months. That said, if you are planning to hang around for 5 years or more, then it should not matter. For me, I would rent for 6-12 months and get to know downtown and keep an eye on the market before buying. 6. One last thing. We keep track of many markets around the world and our sister company PGP Appraisal tracks demographics very closley. You cannot compare the old times with the new times. Urban living; a room with a view is reborn and an inexhorbale force that will finally allow downtown to become a truly great 24/7 urban community. If you are home grown and tainted by the So Cal suburban / ocena fixated culture it may not be for you, but there are billions of urbanites around the world who will love what downtown has to offer. Not everyone needs to surf, but if you visit Atlanta right now, you will be reminded why you live here.

One more thing....yes there is plenty of residential debt out there for conforming loans and well capitalized buyers, particularly new buyers, who represnt a lot of the condo buyers. But, there is no debt available to rescue a $100 million contstuction loan for condos that is under water by 30%-40% off proforma pricing. That debt will have to be recapitalized as previously noted and that recapitalization, unless the lender holds the asset on book, will establish a new basis via which the new owner can drive pricing agressivley, as with Mercury Rising.

The passionate responses from the realtors to this article are very amusing.

This must be the real estate version of a cockblock.

I agree with Fred. It is not uncommon in economic declines to experience a "false bottom." People will cite things like a rise in the stock market and say that signals a recovery. It is important to look at the fundamentals and then judge if we in recovery mode or not. True unemployment is starting to flatten and that is good. But as Fred said, companies are not yet hiring. Also, real wages are declining across the board. The economy could recover in a couple years but I think it will take 12 years for real estate to recover. That is not to say we wait 12 years to buy. but rather we may find the bottom in a couple years. The run up in real estate prices before the crash was attributable to the rise in commercial mortgage backed securities. Those instruments are gone and are not coming back. So it is going to be a while.

Anecdotally, I was looking at another loft to rent yesterday. It was in my view a very nice place with the rents were around $1.70 to $1.90 a Sqft. That is less than what I signed a lease for where I currently live almost three years ago.

Supply and Demand: I am also, a realtor in Downtown. I have many clients that want to buy in Downtown. The good buys are hard to find. The good bank foreclosure come on the market and get sold within days with multiple offers. The short sales take 90 days to infinity to close. And the buyer has a 10-17% chance of getting it. Most of the listings on the market are short sales. Evo has been selling one a day. By the end of the year all the cheaper units in Evo will be sold out. That will leave Concerto if it opens. If Concerto gets bought out, Will the buyer sell a brand new finished building at a discount price when there is such big demand and low supply? Evan Fujii, Wilshire Metro Realty, Inc.

While I was there both over the weekend and yesterday, they were packed with buyers.

If that's an accurate description, and it's not an uncommon experience at various condo and rental locations throughout downtown, then it's important to keep in mind. The amount of demand for housing in the area also can be rather easily estimated by analyzing the situation at, in particular, various rental offices of existing and new apartment buildings.

If there's a lack of enough renters in downtown, then that would suggest the pipeline won't be full enough with enough homebuyers too.

I understand one new apartment building, which opened up not long ago, filled up much faster than I thought it would. However, none of this should be seen as such a big thing. That's because the condition of traffic throughout the region is so idiotic on so many occasions (even in the midst of the current recession) that why anyone would want to put up with it on a regular basis -- by driving dozens of miles through, around and past the original center of Los Angeles -- defies logic and sanity.

Fred, can you comment on how the Alt-A loans are likely to affect the market? I've read that the loan resets along with rising unemployment are going to produce a second wave of foreclosures in early 2010.

From the new edition of the L.A. Business Journal:

"“We are 100 percent victim of the credit markets,” he said, sitting at his expansive desk in front of a colorful painting of the downtown skyline.

Dressed in dark slacks and a light blue guayabera shirt that is typical Cuban garb, Meruelo refused to accept defeat. He noted the company’s biggest residential project yet, a downtown high-rise, remains under construction. He even slipped in word that the company will announce a new residential project in South Park in the next few months.

“Do I like the difficulties that I’ve been in the last year, year and half? No, that’s not fun,” Meruelo said. “But you know, life is not always just fun. But it will get better.”

"So far, the firm has gotten a handful of favorable rulings in U.S. Bankruptcy Court, including how the court plans to treat the bankrupt 53 separate limited liability companies and other entities that legally hold title to each of the company’s properties. In June, a bankruptcy court judge ruled that the entities can be treated as part of a unified enterprise. That will allow Meruelo Maddux to delay interest payments on the debt on many of its properties.

Now, as the bankruptcy presses on, the next milestone in the case is over whether lenders can foreclose on the properties they have claims against. Court hearings on the matter began this month and should be completed in August.

Dan Schechter, a Loyola Law School professor and bankruptcy law expert who is not involved in the case, said that if the creditors are allowed to start foreclosing, that would mark “the end of the story” for the company given the unprecedented weakness of the commercial real estate market.

“It all depends on the underlying business reality. And if I had to predict what was going to happen, coldly, the company is going to fail; it will be dismantled, the lenders will foreclose and the lenders will be stuck with these dog parcels,” he said. “I hope to heck I am wrong, because I don't like it.”

Manuel Funes, the in-house architect for Meruelo Maddux who has long known Meruelo, said the bankruptcy proceedings are weighing heavily on his friend.

“Sometimes you can see the pressure taking its toll, but he remains an optimistic fellow who tends to see the good things,” he said.

Indeed, Meruelo takes pride that despite his company’s reorganization, construction continues at 705 W. Ninth St., which has been held out of the bankruptcy as a separate legal entity. The building’s completion is expected by year’s end.

Even walks downturn can perk him up. The Meruelo family still owns the building that houses his family’s old shop, Belinda’s Bridal. The family got out of that business years ago, and now when Meruelo strolls downtown, he is amazed by the changes – the new housing, residents, stores and nightlife. He takes solace in it all. “What keeps me going is knowing that for me personally there is a brighter future and I think downtown has got a brighter future. I will keep at it. I am not going anywhere,” he said. The detractors, though, aren’t buying it. The feeling is he was too brash and took on more than he could handle. In short, his oversized ambitions got the best of him.

“There are developers who develop for years before they try their first high-rise tower, which especially in Los Angeles are like a degree of difficulty of 10 out of 10,” Tarczynski said. “In his particular case he hadn’t developed anything of significance – that’s like doing 0 to 90 miles per hour in a nanosecond.”

Still, for those who know Meruelo, he seems to engender an amazing amount of loyalty. Take Meraz, the real estate broker who did all those deals during the boom. He admits to an investment in the company’s IPO of more than $100,000, which has largely evaporated.

Yet, he still calls Meruelo his close friend, affectionately referring to him as “Richie.”

“I am holding something I paid 10 bucks for that is worth 28 cents,” said Meraz. “Forget the company, I believe in the man.”

Although Meruelo Maddux Properties is bankrupt, the company is still constructing a luxury apartment tower excluded from its bankruptcy.

Name: 705 W. Ninth St. (Until recently the development was known by the prior address, 717 W. Ninth St.)

Location: Straddles South Park and the Financial District and is a short walk from the L.A. Live entertainment center. The area is home to several new or planned residential projects.

Noteworthy: Meruelo Maddux broke ground on the project without a construction loan in place. In January 2008, the company lost financing it expected to receive. It took eight months to secure an $84 million loan, which came at a high interest rate."

I agree that right now, its all about timing. It is always a safer bet to buy in a building that has already completed construction. If you buy in an incomplete building, the lender could pull out and you may be left with an unfinished apartment with no neighbors.

In the Evo vs. Concerto debate, I agree that Evo is the better choice for several reasons, the first being that it has completed construction and leaves less room for risk and mistake.