Members of the Southern California Development Forum (SCDF) convened on January 30 at the Biltmore Hotel in Los Angeles to explore the ever-evolving dynamics of the real estate economy with Larry Kosmont, CEO of Kosmont Companies and the featured speaker for this month’s event. Kosmont provided valuable insights into deciphering post-pandemic trends in California's economy. The event shed light on strategies for navigating economic forecasts amidst shifting government policies, changing public financing dynamics, and evolving private investments. 

Life in an Ever-Changing World 

The aftermath of the pandemic has ushered in a new era where individuals are less inclined to venture outside unnecessarily. Kosmont highlighted the critical challenges and opportunities presented by this "new world," emphasizing the need for attractive spaces in suburban communities, shopping centers and urban areas. The upheaval caused by the pandemic has underscored the importance of adaptability in addressing the digital economy's challenges. 

Hot and Noteworthy Economic Trends 

The U.S. economy has displayed stronger-than-expected GDP growth, dispelling recession fears. Additionally, low employment and real wage increases have bolstered consumer purchasing power, contributing to a positive employment landscape. Despite a seemingly "boring" economy, positive consumer sentiments- particularly regarding inflation- and GDP growth have marked a return to a more stable economic landscape.  

Conversely, the economy faces ongoing challenges marked by shifts in the employment landscape that bring about labor cost challenges, and uncertainties introduced by artificial intelligence (AI). Key areas of concern include:  

• Inflation concerns persist despite a cooling trend, influencing economic decisions.  

• Capital markets are on a slower recovery path, leading to challenges in project financing, particularly for office and retail properties.  

• Geopolitical risks loom large with ongoing international conflicts posing potential disruptions.  

• Housing affordability remains a persistent and critical issue, particularly in Southern California. 

Experiential and Essential Services: Adaptation in Retail Spaces 

In the realm of retail, adaptive strategies are becoming increasingly important, according to Kosmont. The concept of "retail-attainment," or blending shopping with entertainment, dining, outdoor amenities, and other experiences, has gained traction to attract and engage customers. Essential services, particularly grocery stores and pharmacies, have demonstrated resilience, retaining steady traffic and demand. The ability to adapt to new consumer demands through enhanced shopping experiences and the exploration of new blended uses is crucial. Even parking lots are being viewed as fields of opportunity, showcasing the need for innovative thinking in retail space utilization. 

Underperforming Retail Spaces: A Shifting Landscape 

Conversely, underperforming retail spaces face challenges such as rightsizing needs, with dated malls shifting to a blend of other uses due to the rise of online shopping. The tenant mix in brick-and-mortar retail centers and downtown districts is shifting, with diminishing influence from big-box stores. Pop-ups and co-branded marketing events are becoming more prominent, signaling a changing taste in consumer preferences. Vibrant retail spaces anchored by essentials, experiences/lifestyle, and health/wellness are gaining importance, meanwhile low-end centers face vacancies and impaired valuations slashed, making them ripe for redevelopment. 

Adaptive Workplaces & Technology: Redefining Work Environments 

The landscape of workplaces and technology integration is undergoing a profound shift. The traditional office model is not expected to return as the adoption of telework/hybrid work models leads to a demand for smaller, reconfigurable spaces and a reduced need for centralized office locations. Technology-enabled workspaces, marked by investments in tech to facilitate both in-person and remote work, are poised to reshape businesses. Post-pandemic, there is an increased focus on health, safety, comfort, collaboration, and well-being in the workplace. Office conversions are becoming key in urban markets, with suburban areas potentially witnessing office park demolitions and redevelopment into new uses, though this would necessitate significant investment and capital. 

E-Commerce and Fulfillment: Reshaping Retail Dynamics 

The rise of e-commerce and fulfillment is reforming retail dynamics as we know them. Sustained growth in online retail is shifting physical stores towards showrooms, necessitating efficient distribution and logistics for delivery with an increased focus on reducing delivery times. Stricter regulations, prompted by community advocacy and increased scrutiny over pollution, traffic, and ecological impacts, are shaping the future of the retail landscape. Residential demands for diverse housing options, particularly affordable and mid-tier options near job centers, are on the rise. The concept of live/work/shop has gained prominence post-pandemic, entirely reshaping housing needs and demands. 

California's Vision for the Future 

California stands at a critical juncture, steering through a dynamic, innovation-driven economy. The state's impetus for policy change revolves around three pivotal themes: housing, sustainability, and the regulatory environment. Efforts to foster more density in high-demand areas, reduce parking requirements, and transfer control from local governments to property owners are underway in the housing sector. Sustainability initiatives focus on promoting electric vehicles, developing charging infrastructure, supporting renewable energy generation, cutting emissions, and enhancing climate resiliency. Addressing the regulatory landscape involves tackling the high-tax environment and resolving regulatory hurdles for businesses and consumers. California's challenge lies in finding a balance between costs and benefits, and between requirements and flexibility, to chart a course towards a more prosperous and sustainable future. 

What’s the future for Los Angeles? 

Los Angeles faces substantial challenges, including office vacancies, robust industrial demand, and complexities in the housing market. Despite being a top concern, homelessness and affordable housing face resource constraints, with the city potentially facing a budget shortfall of $400 million. 

Drawing inspiration from San Francisco's center city proposed legislation to form a specialized  Enhanced Infrastructure Financing District (EIFD), Los Angeles has the potential to leverage tax increments for office-to-residential conversions. This innovative approach could address challenges related to homelessness and affordable housing while streamlining the development process across the city. According to Kosmont, the ongoing development of a Downtown LA EIFD could further contribute to the solution by funding infrastructure, housing, and homelessness initiatives. Simply put, establishing a reliable income stream is imperative for expediting transformative measures necessary to maintain downtown Los Angeles’s vibrancy. 

All in all, the insights offered in Kosmont’s presentation underscore the need for adaptability and innovation in navigating the complex real estate economy in the greater Southern California region. Strategic approaches that consider emerging trends and address challenges head-on are essential for success in today’s ever-changing landscape.