Real Estate Predictions 2011: A View from Los Angeles - Panic, Capitulation Plus a Whiff of Despondency?

Best wishes for 2011.

We are certain this is going to me another incredibly exciting year in real estate in which the war-torn, battered and weary sellers are embattled with enterprising, arriviste, opportunistic buyers, creating price and terms clashes of epic proportions.

2011 will be the 2012 of property transfer, in which short sales, foreclosures, receiverships, bankruptcies and various and sundry other forms of financial and legal "work-out" are the norm rather than the exception.

2011 may even be the year of Capitulation (see the Sentiment Cycle above).  Long-term bearish sentiment has left not one optimist in the room -- time to "throw in the towel."

2011 may even possibly be the year of Despondency ("how could I have been so wrong?"), the inflection point setting the stage for the next cycle of price increases.

But maybe not.  2011 may have a whiff of Fear, Desperation, Panic ... and dare we say, Hope?

In whichever direction the market heads, Adner Realty Group will be ringside, ready to chronicle the Los Angeles real estate scene.

And how did our 2010 predictions hold up?  (See our December 31, 2009 post "8 Real Estate Predictions for 2010 - Kissing the Bottom Goodbye - From Panic to Hope and Beyond") We'd give ourselves about a 6.5 out of 8.  To recap:

1. Interest rates will rise.  WRONG.  Our biggest mis-prediction.  Interest rates fell to an astonishing 4.375% for 30-year fixed loans, a low since records were first kept 40 years ago.
2. The bottom of the market for first-time buyers will soon be past us. RIGHT! Prices in 2010 were higher than the ultra-low prices of 2009 when buyers fled the market en masse.
3. Prices will continue to decline on the high end ($1.5 million +). RIGHT! Jumbo loan financing was scarce, and the abundance of short sales and foreclosures drove the market down.
4. Foreclosures and short sales will become pervasive in all segments of the market. RIGHT!  Just because a house costs $2 million doesn't mean it's immune from foreclosure.
5. Over-priced new construction will become less so as developers are forced to chop their prices. RIGHT!  The only way sellers could move the inventory was through red ink.
6. Getting a loan will be tougher than ever. RIGHT! Underwriting standards tightened  considerably leading to delays in most closings.
7. Investors will benefit as properties trade hands at generational lows.  HALF RIGHT.  Multifamily prices are off their lows; industrial prices are flat; but hotel and office sectors have not attained market bottoms.
8. Real estate will begin reverting to its role as a safe, predictable asset class. RIGHT!  Heard any "get-rich" schemes in real estate recently?

We live in remarkable times, in which lows attain new lows, dire gets direr, conflicting indicators jam the airwaves and defy easy interpretation.  Although these times seem extreme, Southern California real estate has a century-long history of careening booms leading to colossal busts.  This remarkable time happens to be "the Big One".  

Los Angeles Driving 101: Parking Permitted at Failed or Dead Meters

We spend a lot of time driving -- and parking -- in the City of Angels. And there is nothing more welcome than the sight of a vacant spot right by your destination ... until you spot the dreaded "dEAd" or "FAIL" digital read-out, leading you to another round of circling the block -- or worse -- putting the vehicle in a $20 lot.

We've gotten some clarification on these broken meters -- you can actually park in these spots!

Amir Sedadi, assistant general manager of the Transportation Department, assured members that "the policy of the Department of Transportation is not to issue any citations to broken meters." But in some instances, Sedadi said, broken meters can inexplicably snap back into operation, which could be why some Angelenos have been ticketed. [LA Times]

According to the article, 10 - 12% of all city meters are broken at any given time. (Somewhat akin to the city's unemployment level.) Conscientious citizens can report failed meters online on the city's website or by calling the city's hotline at (877) 215-3958.

Home for the Holidays: Thanksgiving in Massachusetts or We're Not in LaLaLand Anymore

We are originally from the suburbs of Massachusetts, and we had a great time visiting family and friends back in our home town for Thanksgiving.

On a bright, clear day, we had a chance to walk around the old neighborhood.

The town felt especially quiet, with the streets almost empty -- a far cry from the hustle and bustle of Los Angeles.

Some of the things we always liked were the front porches, the big lawns -- and how different the four seasons felt -- cold winters when it was good to be inside and hot, muggy summers when the trees provided great shade. (Although we admit we are glad we no longer have to rake the leaves during fall.)

On a trip to Boston, we wandered around Beacon Hill and took this picture of Louisburg Square. But we love Los Angeles and are glad to be back home. We hope everyone had a pleasant holiday.

Your Home is not an ATM and 7 Reasons Why You Should Weigh Your Options Before Investing in Real Estate

Over the past couple of years, America has been wracked with financial pain and many of the basic tenets of investment and wealth-building have been upended.

Although real estate has brought some handsome returns, it’s important to point out that real estate has also ruined many property owners who rue the day they tiptoed into “the market”.

Inspired by an article, “Real Estate Price Plunge Makes U.S. Homeownership a Perilous Path” we’ve outlined a few principles that every buyer should consider before signing on the dotted line:

1. A home is shelter. When you purchase a house, condo, duplex, manufactured home or mansion – you are buying a roof over your head. It may indeed be the best investment you ever made -- or the worst. The great American Dream of homeownership has turned into the biggest nightmare for many recent homebuyers.
2. A home is not an ATM. In recent years, homeowners were able to get Home Equity Lines of Credit (HELOC) and could “tap” their equity, open the spigot, and pay for vacations, remodels, and college educations. HELOCs are now much harder to obtain, and the days of home as cash machine are probably long behind us.
3. Past trends are no indications of future performance. Read your mutual fund literature and you’ll find a similar disclosure. The following is the breakdown of annual price appreciation over various decades: 40s – 6.2%, 50s – 15%, 60’s – 4.3%, 70’s – 13%, 80’s – 6.8%, 90’s – 5.1%, 00’s – 2.5%. It’s anyone’s guess where real estate values will head in the future.
4. Tax rules change and so may the tax benefits of homeownership. Although the mortgage interest tax deduction is the sacred cow of the American tax system and has been preserved through generations thick and thin, there’s no guarantee it will continue in the future. Ditto for the deduction of property tax.
5. Real estate belongs in the “risky” pool of your investments. Just because it is real property and it is tangible doesn’t mean its value can’t vaporize just like that great Internet incubator stock you picked in 2000. Although it probably won’t run to zero, many California homeowners have seen the value of their “investment” plunge by 50% or even more.
6. Renting can be cheaper and less of a headache than owning. In much of central Los Angeles, it’s much cheaper to rent a house or condo than to purchase the same. And when your roof is leaking one rainy night during the monsoon season, you may wish you could just call your landlord to handle the problem.
7. You might get lucky and real estate might make you rich. “If you buy a home in Beverly Hills or an apartment on Manhattan’s Upper East Side, over the next five and even 10 years you are going to do very well,” said one quoted consultant. You might build wealth by buying a home – but go into the proposition with eyes wide open.

There are many compelling arguments why you should own a home or invest in real estate, but it’s important to consider the downside and the risks before you – like many Americans – get burned.

Rents Down, Vacancies Up: LA Metro Apartments 1st Quarter 2009

The 1st Quarter 2009 report on Metro Los Angeles rental activity reveals that average asking rents edged down 1% on an annualized basis, a far cry from the 5 – 6% annual rent acceleration during the 2005 – 2007 period.

Current monthly asking rents in the Metro area are $1,016 for a studio, $1,314 for a one bedroom, $1,683 for a two bedroom, and $2,032 for a three bedroom.

It should be noted that Metro Los Angeles includes areas as far and wide as Palmdale/Lancaster, El Segundo, Whittier and Arcadia and should not be equated with Westside LA or Central LA City.

Vacancy rates for apartments in Metro Los Angeles experienced a sharp uptick from 4.5% in the 4th Quarter 2008 to 5.3% in the 1st Quarter 2009.

The decline in construction activity has had a dramatic effect on the rental market. In the 1st Quarter 2009, only 647 rental units were built – and 5,557 were absorbed.

The severe downturn in construction has curtailed the supply and development of new rental units, and the rental market is forecasted to tighten in the coming years.

Below are asking rents and vacancy rates in a few key neighborhoods:

Santa Monica – $2,431 – 3.4%
West LA/Westwood – $2,300 – 5.8%
Downtown – $1,978 – 9.7%
Beverly Hills – $1,856 – 5.4%
Pasadena – $1,704 – 6.3%
Sherman Oaks - $1,578 – 6.3%
Mar Vista/Palms – $1,516 – 3.7%
Burbank Glendale – $1,497 – 3.6%
Hollywood – $1,436 – 3.3%
Van Nuys/North Hollywood – $1,112 – 3.9%
Palmdale / Lancaster – $859 – 9.5%

Note the combination of high rent and low vacancy in Santa Monica, high rent and high vacancy Downtown, low rent and low vacancy in Hollywood, and low rent and high vacancy in Palmdale / Lancaster.

Sherman Oaks – 1st Quarter Market Round Up

Single Family.

The Sherman Oaks market mirrors neighborhoods over the hill: lower median sale price, overabundance of REOs and and short sales, and brisk sales on the lower end.

In the first quarter of 2009 in Sherman Oaks there were 67 single family home sales. The median sale price was $645,000. A solid 16% (11) of these sales were over $1 million. The average days on the market was 49.


The highest-priced sale was 15664 Castlewoods Drive (above), closing at $4,383,000 before it was put on the market. There are few comparable properties -- 7,305 sq ft of living area, 32,051 sq ft lot, pool, tennis court, new construction, views.


28% of all home sales were either REO (13) or short sales (6), and these were not exclusively on the lower end of the market. One REO, 2946 Glenridge Drive, sold for $1,250,000. Another sold for $900,000.

One MLS listing advertised:“this is a regular sale.” It should read, “this is a liability”, since ordinary sellers not in distress are competing with the ultimate motivated sellers: the banks.

Condo.

The Sherman Oaks condo market in the first quarter of 2009 did not differ significantly from the single family market. 5% of sales were REO, 20% of sales were short sales. The median sale price of a condo was $415,000. Average sale time was 142 days on the market.

Las Vegas CityCenter: Colossal Debacle?

Las Vegas’ MGM Mirage CityCenter, one of the most expensive construction projects in the world, may be the AIG of real estate – teetering on the brink of insolvency, but too big to fail.

The stakes are enormous – the $9 billion project – a 67-acre “mini-metropolis” with condominiums, hotels, retail and casinos – would remake the landscape of Las Vegas. The project currently employs 8,500 in construction and would result in 10,000 full-time jobs.

Global titans in architecture – Cesar Pelli, Norman Foster and Daniel Liebskind – left their impratur on the colossal development of epic proportions. In typical Vegas fashion, the developers risked it all – and now it’s unclear whether the crap shoot was worth it.

It was conceived as the centerpiece of a thriving Las Vegas -- one of the world's most expensive building projects that would bring back glamour to the Strip and cap an unprecedented three-year economic boom.

Instead the $9 billion development named CityCenter -- touted as the city's most ambitious endeavor -- has come to symbolize a global retail and leisure slump and the city's struggles to come to grips with crushing unemployment and dwindling casino revenue.

Partners MGM Mirage struggling to bankroll the project's ballooning cost -- and Dubai World DBWLD.UL had pondered placing the development under bankruptcy, thrusting its future into question, sources say.

In March, Dubai World, the development arm of the United Arab Emirates, sued MGM Mirage, claiming mismanagement and wanting out of further financial commitments. The U.S. company hired bankruptcy counsel, setting off alarms about solvency. And the company was forced to inject an emergency $200 million to keep construction going.

"The events of the last six months have been our Pearl Harbor, economically," said Bill Thompson, gaming expert and professor of public administration at the University of Nevada, Las Vegas. "CityCenter might be too big to fail. If it opens, it's a dramatic gesture that says we're winning, we're not defeated, we're on the way back."

"If it fails, it would be like a second Pearl Harbor." [Reuters]

Paris, Jolie

While Los Angeles deals with eternal gridlock, eternal the City of Lights is doing some bold imagining for its future.

Hand it to the French. Who else would pick an economic collapse as a time to unveil one of the most audacious urban plans in recent memory?

Yet the 10 proposals for a new master plan for metropolitan Paris, which were unveiled last week, may just be the kind of brazen idealism the world needs right now.

Among the most audacious is Mr. de Portzamparc's plan, which proposes demolishing both the Gare du Nord and the Gare de l'Est and replacing them with a single massive European train station just outside the city center.

Other plans are more poetic. Jean Nouvel proposes creating a green belt that would circle the entire city. All future construction would be concentrated inside this belt, adding density to what are now sprawling, isolated communities. [Source]

When will the subway to the sea be built? 2032?

What Happens When the Bohemians Leave Bohemia?

Over the past decade of "prosperity", up-and-coming enclaves such as Eagle Rock in Los Angeles and the Lower East Side in Manhattan gained residents -- and coffee shops, restaurants and design stores.

In Eagle Rock, the new bourgeouis bohemians ("bo-bo"s) arrived, flush with web start-up capital, screenwriting lucre and steady paychecks from architecture gigs. The median sale price of a home in Eagle Rock rose from $260,000 in 2000 to $620,000 in 2005

Derelict buildings gained eager new tenants with "big ideas" for retail. Old-school businesses such as car repair shops were replaced by hip new eateries and purveyors of design and antiques.

But, alas, the economy has soured and the wave of gentrification seems to have receded. The neighborhood has reverted to being its quiet, modest and often, charming, self. Maybe it reminds people why they moved there in the first place. [Source]

Jamie Adner

Beijing Builds It ... They Don't Come

For locals who are distressed about the queasy state of the US real estate market, be glad we're not in the quandary of Beijing, where the scope of speculative building was unparalleled in the world.

By one account, 500 million square feet of commercial real estate was developed there since 2006 -- more than all the office space in Manhattan. Nearly 20% of this commercial space is vacant, and it would take 14 years to absorb at the brisk pace of leasing from 2004 - 2006.

Real estate development in China is different from that in the West, since there is no private ownership of land. The Chinese government will end up holding the bad debt for properties that cannot be leased.

Nearly all the grand structures of the 2008 Summer Olympics -- including the Bird's Nest main stadium -- have found little use post-games.

Luxury housing developments, where units are priced at $800,000 -- in a country where the average salary is less than $6,000 per year -- are going unsold.

Occupancy in Beijing's hotels -- many of which are newly constructed luxury buildings -- is said to be 10 - 30%. Even during the Olympic games, occupancy is reported to have been only 67% because of Beijing's stringent visa and travel requirements.

And in other news, the International Herald Tribune reports that sales of international second homes are tanking.

It's a small world, after all. And we're all in this mess together.

Jamie Adner

The Wilshire Corridor From Back In the Day Makes a Comeback

Another axis of great development activity in Los Angeles is along storied Wilshire Boulevard from Downtown through Miracle Mile, reports the Los Angeles Times. Up until the late 1980's, this area along Wilshire was a major business center, populated by companies such as Union Bank, Texaco, IBM and Getty Oil. But following the recession of the early '90s and the riots of 1992, the area fell into decline.

But "the other Wilshire Corridor" is back in full force, with thousands of residential units under construction or in the planning phase, and new high-rise towers breaking ground. The area is exempt from a city law passed in 1986 intended to curb the development of high-rise towers, and is coming to epitomize the vision of LA as a city where people live, work and shop within their own neighborhood -- and perhaps even rely on public transporation. The network of local bus, subway and rail connections is excellent. The area also has the city's -- and perhaps the nation's -- best stock of vintage Deco buildings that a ripe for improvement.

Part of resurgence in the area has been led by Korean American and Korean investment. South Korea recently raised the amount of capital that can be taken from the country, contributing to the flow of funds into the area. Upscale towers are rising at Wilshire and Western and nearby areas to accommodate buyers who want all the city's necessities at easy access.

www.adnergroup.com

Vegas Tower Breaks Glass Ceiling of $1,500/sq ft

Three penthouses in Las Vegas' Harmon Hotel, Spa & Residences have closed at prices ranging from $1,500 - $2,400/sq ft, a new record. Units are in one of four high-rise developments in 76-acre MGM CityCenter, cited as being the most expensive private development in the U.S. (Last August Dubai World invested $2.7 billion for a 50% stake in the project.) Promoted lavishly even by Vegas standards, the MGM CityCenter has a sales office described by the Las Vegas Sun as "Disneyland for the competitively acquisitive. The Cirque du Soleil of open houses. Architects Gone Wild."

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