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Is DTLA a good investment?

Is DTLA a good investment?

Real Estate

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Los Angeles City Hall at sunset June 22nd 2013

Investing in downtown Los Angeles (DTLA) can be viewed through a lens of optimism, colored by the city’s ongoing developments, population growth, and the involvement of notable investors.

Moreover, the promise of urban development and infrastructure improvements, largely propelled by the city’s preparation for the 2028 Olympics, sheds a favorable light on the future of real estate in the area. The anticipation of enhanced amenities, transportation facilities, and public spaces could potentially uplift the overall value of properties within DTLA.

Equally significant is the expansion trajectory of renowned universities like UCLA and USC in the region. These institutions not only contribute to the academic fabric of the city but also act as catalysts for regional development. Their expansive budgets and plans for acquiring more towers for campus expansion are indicative of a future rise in demand for real estate. The presence of such educational behemoths can have a ripple effect, fostering community development, enhancing local services, and thereby, increasing the desirability of the locale.

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Map of the Greater Los Angeles Freeway system – with Downtown Los Angeles at its center.

Another compelling factor that underscores the potential of investing in DTLA is its ability to accommodate a swelling population through the construction of high-rise buildings. The growing need for housing solutions within the confines of the city can trigger a surge in property values, presenting lucrative opportunities for real estate investors.

The entry of seasoned and large-pocketed developers, like Howard Marks & Larry Silverstein, into the DTLA landscape can be construed as a testimony to the area’s potential. The acquisition of significant properties and the announcement of new leases and extensive capital expenditure programs reflect a robust confidence in the region’s prospective growth.

Yes, the homeless situation has not dissipated. However, one would think that is a lagging indicator. Not a forward indicator.

Los angeles 1908

However, alongside these promising prospects, there are inherent challenges and uncertainties that warrant careful consideration. The issue of homelessness, despite ongoing efforts for mitigation, remains a considerable challenge. The complexity of this social issue implies that the pathway to resolution is uncertain, and the timeline for discernible improvement remains ambiguous.

Furthermore, the ever-fluctuating economic conditions, variations in interest rates, and overarching trends in the real estate market play pivotal roles in determining the return on investment. The regulatory landscape, characterized by evolving zoning laws, building regulations, and housing policies, can also significantly influence real estate development and values.

Market dynamics in real estate are inherently cyclical and can be unpredictable. As such, discerning whether the current market conditions are conducive to investment is paramount. Real estate investments typically necessitate a long-term outlook. Therefore, investors must contemplate their investment horizon and assess the likelihood of transformative changes in the area during that period.

We spoke with Wharton‘s Dean’s Chair in Real Estate Professor Gilles Duranton who told us:

Gilles Duranton

“Unless some major disruption to LA’s place in the entertainment industry occurs, LA has run out of space and should remain really expensive. That’s the basic fact about LA (and Miami). The key to caveat is not that entertainment is not disrupted, it is big time but that LA loses its unique place. The chit chat about AI seems unconvincing to me for many years to come, you still need talent in this industry and this is where it congregates.

Adding to this, Downtown is a newly re-emergent area and even if the office market tanks even more than expected, there’s more and more people living there. A bad scenario where prices would tank is if the city allows for a lot more building and replace all these bungalows by multi family developments everywhere. With a lot more supply LA’s price would go down but the city could surpass New York as the largest American city. But I am not holding my breadth. Finally, there is this new transfer tax and all sorts of bad policies in the books but long run this is not changing the core fact above – it’s an attractive location with no space left.”

Of course DTLA has its share of detractors!

One Los Angeles-based developer told us off the record:

“Downtown LA is a challenged office market with tenants consistently preferring to lease in other submarkets in LA.  Residential may continue to thrive as an increasing population in southern California prefers urban living, but the current homeless challenges in DTLA are a headwind.”

In conclusion, while downtown LA presents a canvas of promising opportunities for real estate investment, marked by urban development, institutional expansion, population growth, and the involvement of esteemed developers, it is not without its set of uncertainties. For investors navigating this landscape, conducting comprehensive research, seeking expert consultation, and possibly diversifying their investment portfolio emerge as prudent strategies to balance the potential rewards and inherent risks.

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