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Monday Morning Quarterback
(Monday, July 10, 2023)
Notwithstanding Tesla's new pick-up truck design (see above), Musk's other company, Twitter, still gets evicted! Under a barrage of lawsuits over nonpayment of office rent in the U.S. and UK, Twitter is being evicted from an office in Boulder, Colorado. Last week, a Boulder County judge ordered the sheriff to remove Twitter from 3401 Bluff St. in Boulder, the Denver Business Journal reports. The order follows a complaint filed by Twitter’s landlord, an affiliate of The John Buck Company, last month. The judge’s order directs the sheriff to evict Twitter and is in effect for 49 days. Twitter established a $986K letter of credit the landlord could draw from to pay rent, but the letter was not replenished in compliance with the agreement after the landlord withdrew the March rent. In April, Twitter was served with a “demand for compliance or possession,” requiring it to either vacate the property or pay into the letter of credit. It did neither! And Twitter’s legal trouble stemming from failure to pay for its office properties is spreading. Last December, the social media company was sued by landlord Columbia Properties Trust over $136K in unpaid rent at 650 California St. in San Francisco. The following month, the Crown Estate filed suit with the High Court in London for nonpayment of rent at a property in that city. The company stopped paying rent at several properties after its high-profile, $44B takeover by Elon Musk last fall. Several top executives were fired at the time, and layoffs have occurred since then, along with other cost-cutting measures. Musk says the company’s financials were improving ahead of its earnings call, but as of 2022, the company is not profitable. Twitter has maintained office space in Boulder since 2014, when it acquired Grip, and it has several locations in the city. A cleaning company that worked at Twitter’s 1301 Walnut St. office last month also filed suit in Boulder County Court, seeking $93K in unpaid cleaning fees. In other real estate investor news, let’s get under the hood…
Consumer Confidence Leaps to 17-Month High. A survey of U.S. consumer confidence jumped to a 17-month high of 109.7 in June, reflecting a slowdown in inflation and fewer worries about a recession. The closely followed index increased 7.2 points from a revised 102.5 in May, the Conference Board reports. The May reading was the lowest in six months. Consumer confidence is important to investors because it signals whether our economy is getting better or worse. The index is still well below the levels associated with a healthy economy, however. Americans think inflation will continue to slow. They see prices rising 6% in the next year, the lowest reading since the end of 2020. Consumers have been telling pollsters for the past year that they are unhappy about the economy. Yet they are still spending like our economy is in good shape. What explains the divide? Inflation is running high and Americans are paying more for everything. Yet wages are also rising, unemployment is low and people are secure in their jobs. That’s given them the confidence to spend — and to keep our economy out of recession.
PCE Gauge Shows Lowest U.S. Inflation Rate Since April 2021. Core PCE price index increases 0.3% in June. In other words, inflation is slowing, but it’s still painfully high. The cost of goods and services rose a scant 0.1% and points to a gradual easing in U.S. inflation, but prices are still rising sharply in key parts of our economy. The increase in the “Personal-Consumption Expenditures Index” is the Federal Reserve’s preferred inflation barometer. The increase in prices over the past year slowed to 3.8% from 4.3% and dropped to the lowest level since April 2021, the government said Friday. Waning gas and food prices have played a big role in restraining inflation this year. The rise in the so-called core PCE rate of inflation over the past year dipped to 4.6% from 4.7%. Yet the core rate fell more slowly than the headline number and suggests inflation is likely to persist for some time. The core rate has ranged from 4.6% to 4.8% over the past seven months. Inflation is slowing, but it’s still too high for the Fed. Senior Fed officials worry that rising labor costs and price increases in major parts of our economy (such as housing) could keep inflation at elevated levels for a few more years.
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S&P CoreLogic Case-Shiller 20-City House-Price Index Rose In April. The S&P CoreLogic Case-Shiller “20-City House-Price Index” rose 0.9% in April, as compared with the previous month. (Their Index is always two months behind.) U.S. home prices rose in April as the housing market contends with a scarcity of for-sale listings. Homeowners’ unwillingness to sell is pushing up home prices (despite elevated mortgage rates). Though mortgage rates are hovering around 7%, rates have not dampened buyer demand, as home shoppers have largely adjusted to the higher rates. The year-over-year change in home prices in April was down 1.7%, accelerating from a dip previous month of 1.1%. A broader measure of home prices, the National Index, saw a month-over-month rose in April of 0.5%, but that metric was down 0.2% over the past year. Meanwhile, a separate report from the Federal Housing Finance Agency also shows home prices rising in April, up 0.7% from March. Over the last year the FHFA index was up 3.1%. Looking at the list of the top-performing cities, New York and Cleveland inched up to spots No. 5 and 6.
Will L.A. Have an Office Apocalypse or Housing Boom? Facing a persistent housing crisis, Los Angeles is doubling down on converting unused commercial buildings into residential properties. Last month, as part of the DTLA 2040 Community Plan, the City Council approved a long-awaited update to the Downtown Adaptive Reuse Ordinance adopted in 1999 (which enabled the production of more than 12,000 units of new housing). The update would make more commercial buildings eligible for incentives such as streamlined permits and flexible regulations. This might seem like the perfect time for office-to-apartment conversions: The persistence of remote work has led to record office vacancy rates in L.A. Plus the dramatic increase in interest rates over the last year made refinancing loans for office buildings very difficult, prompting defaults and distressed sales. “Maturity defaults”” (loans that have come due and cannot be refinanced) have surged. Nearly 90% of office loans maturing this year are likely to face difficulty in refinancing. In downtown L.A., skyscrapers are selling for half of what they did a decade ago. Given that high commercial real estate prices have typically hurt the financial feasibility of adaptive reuse projects, a steep decline in office building prices could be helpful in theory. But high interest rates also make conversions more costly to finance. Measure ULA (the so-called “mansion tax” that took effect this April) is another disincentive for both selling and converting office properties, applying a 4%-5.5% tax to transactions for commercial properties and multifamily housing properties as well.
Turning Office Buildings Into Apartments Will Ease California’s Housing Crisis. As a continuation of my previous story (see above), California’s many half-empty office buildings and vacant big-box stores may soon get new leases on life. Thanks to local and state efforts to loosen land-use laws, developers in California will soon find it much easier to convert commercial properties into apartments, condominiums and townhomes. The change couldn’t come at a better time. Every week it seems there is more bad news from the commercial real estate sector. Owners of commercial high-rises in San Francisco and Los Angeles have defaulted on their loans, and an increasing number of office buildings throughout the state are considered “Zombies” for being only half leased. Some recent high-profile exits — including mall giant Westfield’s decision to walk away from its downtown San Francisco Centre — are a reminder that retail vacancies in many cities are still higher than before the pandemic. The moribund suburban strip malls and downtown office buildings present a tremendous opportunity for California to address its most pressing problem: the crippling shortage of housing that has driven up rents and home prices to unaffordable levels. Perhaps the biggest reform came July 1 when Assembly Bill 2011 took effect. The law, written by Assemblymember Buffy Wicks (D-Oakland), fast-tracks approval to build 100% affordable housing on most properties zoned for retail, office or parking. The law also gives expedited approval to projects with a mix of market-rate and affordable housing when they are located on four- to eight-lane commercial corridors. One analysis suggested underutilized commercial properties in Los Angeles County could accommodate 1.6 million housing units. But adaptive reuse can be just as expensive as new construction, which is why the state budgeted $400 million over two years to encourage private adaptive reuse projects. It’s a hopeful sign that local and state lawmakers have been willing to ease zoning laws to encourage redevelopment and adaptive reuse. California can’t afford to let offices and strip malls sit empty when the need for housing is so great.
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Park La Brea Closes on $947M Loan. The largest apartment community on the West Coast gets a new $947 million loan. Congratulations! Newmark Group Inc. represented borrower Prime Residential in the loan for the Park La Brea apartments. The financing will allow the company to retire its existing debt and is being secured by Freddie Mac’s K-Deal program. Park La Brea, which sits at 6200 West Third St. near The Grove, has 4,249 units spread across 18 high-rise towers and 175 garden-style buildings. Roughly 10,000 residents live in the 144-acre community. Park La Brea is the largest housing community west of the Mississippi and an iconic Los Angeles asset. This was a historic financing that contains a variety of custom features, including the flexibility to construct a significant number of Accessory Dwelling Units (ADUs) on the property, which will contribute towards addressing the state’s housing and affordability crisis. Park La Brea was developed by MetLife from 1941 to 1950. Prime Residential has owned the property since 1955. It is 95.5% occupied and is rent-controlled. The property’s next rental increase would come in February.
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Airbnb Stay at a Zaha Hadid Building in Seoul. How about a once-in-a-lifetime experience in Seoul, Korea. Two lucky fans could win the getaway of a lifetime at the futuristic Dongdaemun Design Plaza in the South Korean capital. Airbnb is partnering with K-pop band ENHYPEN to host a one-night stay at Dongdaemun Design Plaza ahead of Seoul Fashion Week this September. Not only is the exclusive stay at the Zaha Hadid- designed structure located in the epicenter of the city’s fashion district, but guests will sleep on a literal runway in the neo-futuristic building. Whoever nabs the one-time reservation will be welcomed into the top-floor loft space by a personalized video from ENHYPEN. Along with a particularly plush-looking bed and a lit-up runway that extends from it, the modern dwelling will be decked out with a lounge area and a dressing room complete with garments from innovative up-and-coming designers, so that guests can put that runway to work (and even take some pieces home). There will also be a selection of snacks, drinks, and books personally curated by the boy band, plus a pair of autographed Polaroids of the group to take as a souvenir. The fashion lover who is quickest to book the stay (plus one lucky friend permitted to join them) will also receive a guided tour of DDP’s unique park-like rooftop and complimentary passes to Seoul Fashion Week with front row seats to the runway shows.
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Quirky Alhambra Bridge House Sells for $430,000. After a frenzied bidding war, a quirky house built underneath a bridge over a concrete drainage channel in Alhambra has sold for $180,000 over the asking price in what still may be considered a bargain in Southern California’s pricey real estate market. The unusual location of the house and its comparatively modest $250,000 asking price drew national attention and hundreds of visitors when it hit the market a few weeks ago. Most of the visitors were looky-loos who wanted to get a peek at the small home someone built in 1949 into the side of a bridge owned by the city overlooking the Alhambra Wash. People were enthralled by what TV tabloid show “Inside Edition” called “the troll house” for its bridge location — more than 155,000 have viewed the show segment about the home posted on YouTube. The 450-square-foot dwelling on the 1300 block of East Main Street has a terrace that looks over the wash and a rooftop patio that sits next to a road bridge, separated only by a fence. It’s within walking distance of a Vietnamese restaurant and a hair salon but has no designated parking spot. The house is a one-bedroom, one-bath fixer-upper. The home last sold in 2005 for $72,000. The plan was to use it as a swanky “man cave,” but it sat vacant for nearly two decades according to KTLA 5.
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Driverless Cars Are Driving San Francisco Residents Crazy. Waymo and Cruise are operating driverless cars in San Francisco, where the fire chief says “They are not ready for prime time.” The growing driverless car fleets in San Francisco are both a fascinating glimpse of science fiction come to life and a scary example of how Big Tech and auto companies have run roughshod over a congested city, with technology that really isn’t ready yet and little regulation to keep it at bay. Aaron Peskin, president of the city’s Board of Supervisors, says there have already been 66 incidents in which driverless cars interfered with first responders just this year alone. But the city has little control over the cars operated by Cruise (a unit of General Motors Co), and Waymo LLC (a subsidiary of Google parent Alphabet Inc). Both companies already have Department of Motor Vehicle permits to deploy a driverless passenger taxi service, a process Peskin described as “Kafka-esque.” Now, the problem is coming to a head. San Francisco public officials have had enough, and are speaking out about safety threats ahead of a hearing next week that could let companies expand into larger fleets of fare-generating robo-taxis. Both companies are seeking to expand their operations in San Francisco, leading to a crucial meeting of California’s Public Utility Commission. Waymo is seeking to begin passenger robo-taxi service in the city, while Cruise is seeking to expand its passenger robo-taxi service to the entire city, 24 hours a day, and remove exclusions of steep hills and roundabouts, deploying 100 vehicles. “San Francisco is the perfect place to test them,” Supervisor Peskin says, “But they still haven’t worked these kinks out.”
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An Evening with Rick Sharga. There aren’t many celebrities in the real estate world, but there is one very special individual who stands out. When CNN or Bloomberg need a real estate expert, there is only one person they interview. When CBS or NBC News need analysis of a difficult real estate issue, there is only person they call. When CNBC or ABC News need a real estate authority on a breaking story, there is only one person they turn to. When NPR or the Wall Street Journal need a quote from a real estate expert, there is only one person they ask. Heck, other than Kim Kardashian, probably no one appears on TV, radio, online, or in L.A. Times more frequently than Rick Sharga, the number #1 authority on real estate economics. And we have him exclusively at our July 13th meeting. The title of Rick’s presentation will be “Real Estate Investing in an Uncertain Economy.” Thursday night, July 13, 2023. Iman Cultural Center, 3376 Motor Avenue, Los Angeles, CA 90034. FREE Admission. Please RSVP at www.LARealEstateInvestors.com.
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Vendors Expo Returns! Our carbon-neutral, bio-degradable, gluten-free, super-duper "Vendors Expo" returns on Thursday night, July 13, 2023. The Vendor Expo opens at 6:30 pm. We'll have 40+ of the finest vendors featuring real estate products and services you will want to utilize as a successful investor. Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, CA 90034 (Culver City adjacent). FREE Admission. Please RSVP at www.LARealEstateInvestors.com.
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Foreclosure Forum. How to find and buy foreclosure properties. Saturday, August 5, 2023, 9:00 am to 5:00 pm. Iman Cultural Center, 3376 Motor Avenue, Los Angeles, CA 90034. Iman Cultural Center, 3376 Motor Avenue, L.A., CA 90034. The cost of the Forum is $149.00 per person if paid before July 29th. After July 29, the price increases to $1 million. (Gold Members can attend for FREE.) So don't wait! Register now: www.LARealEstateInvestors.com.
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“LARealEstateInvestors.com” Podcast. We are so very excited to announce our new podcast, "LARealEstateInvestors.com" (named after our domain) hosted by our very own Bill Gross. Bill has been a Realtor, broker and real estate investor forever! No one is more experienced in local Southern California real estate than Bill Gross. Each week, Bill interviews real estate professionals sharing their insights and advice for real estate investors. Every Tuesday live at 3:00 pm, and anytime thereafter on YouTube, Facebook, and Google.
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This Week. Investors will continue watching for Fed officials to elaborate on their plans for future monetary policy. For economic reports, the most highly anticipated report will be the Consumer Price Index (CPI) on Wednesday. CPI is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services. Beyond that, the Producer Price Index (PPI) will be released on Thursday and Import Prices on Friday.
Weekly Changes:
10-Year Treasuries: Rose 020 bps
Dow Jones Average: Fell 500 points
NASDAQ: Fell 100 points
Calendar:
Wednesday (7/12): Consumer Price Index
Thursday (7/13): Producers Price Index
Friday (7/14): Import Prices
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For further information, comments, and questions
Lloyd Segal
President
Los Angeles County Real Estate Investors Association, LLC
www.LARealEstateInvestors.com
This email address is being protected from spambots. You need JavaScript enabled to view it.
310-409-8310
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