DOES DOWNTOWN REALLY REPRESENT THE BEST WE CAN DO?

The following post was published as a rebuttal to a piece by Steven Sharp that appeared in the LA Times last month (Downtown has a high apartment vacancy rate? The rest of L.A. should be so lucky, LA Times, 2/13/2018). In it, Sharp responds to critics who expressed alarm over high vacancy rates reported in Downtown LA last year, and cites figures from CoStar to show that the number of empty units has declined.

Our response is based on skepticism about the way Downtown developers are dealing with high vacancy rates. In 2017, both the LA Weekly and Curbed reported that Level Furnished Living (LFL), a building approved by the City for residential use, was now advertising units that were available for stays as short as a single day. Essentially this means that a building that was approved as a residential tower is now functioning as a hotel, and that 303 units meant for people to live in are now available for overnight visitors. If the Downtown property market is as hot as Sharp claims, it seemed odd to us that the building's owners would be converting housing into hotel rooms. It also seemed like the conversion would be an easy way to remove vacant units from the market.

But after our post was published, a reader alerted us to the fact that LFL had been functioning as corporate housing, or an extended stay hotel, pretty much since it opened. (Developer plans fully furnished apartments in downtown L.A., LA Times, 2/25/2015) Have the owners illegally engineered a change of use? Or has LFL always been a hotel?

The July 30, 2013 determination letter from the Department of City Planning (DCP) says that the approved project consists of 303 residential condominiums and 7 commercial condominiums. A search on ZIMAS, LA's on-line zoning information system, shows no subsequent approvals that alter the building's use. The City has argued that the extended stay use was permitted, because visitors would be residing at LFL for longer than 30 days. But it's clear that since last year, folks are invited to stay at LFL for a lot less than 30 days, and LA's zoning code clearly prohibits this. A spokesman for LFL's owner claims that they've been working with the City to create a transit occupancy permit for the building, but the City has not offered any comment.

Since our response to Sharp's piece is based on the estimation of Downtown vacancy rates, this does make the situation more ambiguous. Were LFL's empty units included in vacancy numbers prior to 2017? Were they ever included at all, since it seems that the building has functioned as a kind of hotel ever since it opened? What is clear, though, is that the DCP approved 303 units as residential condos, and that these units are now being offering as hotel rooms.

LFL aside, our point is that across LA housing is being converted to hotel rooms. And it's clear that City Hall is complicit in the process. Not only has the City failed to enforce existing laws, but it has willingly allowed at least one other property (The Metropolitan in Hollywood) to change from an apartment building into a hotel.

How is it possible to come up with accurate vacancy rates when property owners are taking units that were intended for housing and posting them on-line for tourists? And how is it possible that City Hall has still failed to pass an ordinance that would legally clarify the difference between the two uses? An even more disturbing question is, how is it possible that at a time when renters are being evicted so that landlords can convert units to short-term rentals, the City has done almost nothing to enforce laws that are already on the books?

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In Steven Sharp's recent Los Angeles Times op-ed, "Downtown has a high apartment vacancy rate? The rest of L.A. should be so lucky." the author responds to critics of real estate trends in the Downtown LA. While many critics, like us, have questioned the need for so many luxury high-rise apartment buildings in the central city, Sharp claims that widely cited statistics on their high vacancy rates are misleading. In his view the new, expensive units are necessary to meet demand, and this trend should be emulated in the rest of Los Angeles.

We sharply disagree with his conclusions for the following reasons.

The real estate research firm CoStar caused a stir last year when it reported a 12.4% residential vacancy rate in Downtown LA. Sharp notes that CoStar's data showed a drop to 10.3% in January 2018. He then says the vacancy rate has declined further to 8.1%, and 4.7% for buildings that have been open for one year or more. Looking at these numbers out of context creates the impression that developers have been right all along. Their bet on high-priced housing paying off, and it was only a matter of time until the real estate market absorbed their expensive units.

But do these numbers tell the whole story? Hardly.

In September 2017, KPCC reported that more than 2,000 of the over 21,000 market rate apartments in the Downtown were vacant. And in November 2017, the LA Weekly reported that the owner of Level Furnished Living (LFL), a high-rise apartment building at 9th and Olive, converted its building to an extended stay hotel.

Where LFL led, by converting 303 apartment units into hotel rooms to protect its bottom line and reduce the residential vacancy rate, others will soon follow. In fact, The Metropolitan in Hollywood also pulled the same stunt, all with City Hall help. The owners of The Metropolitan asked the Department of City Planning to grant a Transit Occupancy Residential Structure (TORS) overlay. They got their wish, and are now in the process of converting over 50 apartments into hotel rooms.

Meanwhile, many apartment building owners are not waiting for City Hall’s blessing to make the same changes. Since the City Council has failed to pass an ordinance regulating short-term rentals and since the Department of Building and Safety does not enforce existing laws barring this practice, there are numerous reports of local landlords converting also their residential units into short-term rentals.

But, even if we accept Sharp’s numbers as accurate, it’s important to test his supply-side argument through Downtown LA’s real estate market. He says, “Downtown's growth has created competition among landlords for residents. Prices have leveled accordingly, and many property owners have resorted to incentives, such as free parking or discounted rent in order to lure tenants.” It is true some downtown rents have plateaued, but we need to look at the words “discounted rent” carefully. What landlords are actually doing is offering one or two months of free rent when prospective tenants sign a lease for expensive apartments. While tenants are getting a short-term discount of between 8 to 16 percent for one year, the rent is remaining the same because the owners cannot afford to make significant long-term rent reductions.

Their projects are financed by global investors enticed to Los Angeles by a high rate of return on their money. For them, these aren’t just residential buildings; they’re financial assets. In order to retain their value, their rents must remain high to assure a handsome profit. Supply-siders repeatedly argue that if City Hall aggressively green lights new residential construction, housing costs will fall. But will these become affordable for the average Angeleno family? In 2017 the Zumper real estate site reported the median monthly rent for a one-bedroom apartment in Downtown Los Angeles was $2,500. The median household income in Los Angeles is around $55,000 a year. The standard formula dictates a household should spend one-third of its income on rent, which comes out to $1,500 a month. There’s no way the rent for these new units will permanently fall by 40% or more to this level. As a result, middle-income and low-income households are priced out of the Downtown, assuming they could even squeeze a family into a one-bedroom apartment.

Sharp insists that “supply and demand” is a fundamental law of nature, like gravity. But his strict supply-side view is hardly a natural law, and it cannot explain 21st century urban real estate markets. These markets are now global. Companies most of us have never heard of pour billions into lucrative real estate projects that are nothing more than a prospectus for distant investors. Real Estate Investment Trusts (REITs) buy and sell assets, like high rise apartment buildings in downtown Los Angeles, based purely on profit projections. Such immediate consequences as pollution, displacement, overcrowding, and gentrification are irrelevant to them.

Furthermore, the emergence of short-term rentals means that many property owners, like LFL, have realized that a “hotel” is far more profitable than an apartment building. A number of the city's hottest neighborhoods are seeing badly needed supply taken off residential market so landlords can please investors by renting empty units to tourists.

Sharp finishes his article with, “Downtown isn't a case study in what's wrong with development in Los Angeles. It's the best model we have for what's right.” This is a truly startling statement; one that makes clear how completely disconnected his view is from reality. While City Hall has had important successes in revitalizing DTLA, the same area continues to be plagued by exorbitant housing prices, rampant homelessness, crumbling infrastructure, and rising crime rates. Transit ridership continues to fall, as traffic congestion grows worse. And in spite of all the talk about creating livable communities, local government still has not even found a permanent home for the Downtown’s only elementary school.

If Downtown is the best model City Hall has to offer, we are in deep trouble.