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The 2019 Annual SCDF Real Estate & Economic Forecast: California Dreaming – If the Gold is Going, will Green Save the Dream?

01/29/2019 12:47 PM | Bill Hess for SCDF

Whether you are a native of California or a fresh arrival, the phrase “California dream” is likely one you have heard. However, it’s meaning has changed over time. Today, our state grapples with a multitude of unique issues that affect our economy and industry in a variety of ways. As the most populous state in the nation, and also burdened with a housing shortage, developers must consider certain trends and opportunities when conducting business. Larry Kosmont, president and CEO of Kosmont Companies, partnered up with Lew Horne, division president of Southern California, Arizona, and Hawaii at CBRE, led a panel discussion focusing on these issues.

The Year of the H

Lew Horne kicked off the panel discussion by breaking down the core concepts which he referred to as the year of the “H”, or 4 key elements beginning with the letter “H” that make Los Angeles so unique. The first among them was the historic forum characteristic.

More importantly the historic forum aspect of our city is highlighted in the adaptive reuse category. Horne notes that while Los Angeles is lush with adaptive reuse projects, they are most apparent in Downtown Los Angeles and the Arts District. The Apple Store going into DTLA is a prime example of adaptive reuse. There have also been speculations that Apple’s selection of this space may be a signal that the tech company may venture into becoming a major Hollywood content creator.

The second “H” pointed out by Horne is high density, which is somewhat of a divisive issue among Angelenos. Horne also alluded to the fact that Los Angeles hosted 50 million visitors last year alone. A high demand for space by both the hospitality industry, as well as local residents continues to create issues centered around real estate development in a time where space is at a premium. To put it simply, when talking about Downtown Los Angeles, the only way is up. The region was home to approximately 50,000 residents 2 years ago, present day figures show the number has surged to slightly over 70,000 residents.

High-tech is the third “H” as pointed out by Horne. “Tech quite simply, is changing everything,” he said. “It is changing offices, changing industrial and changing retail. Tech is the new industrial revolution.”

Horne also mentions that tech tenants, which are innovative and forward-thinking in nature, view adaptive reuse as a way to attract and retain talent.

Whether brand new or redeveloped, Los Angeles is the number one target for foreign investment. Horne cited an approximately $170B in foreign investment capital being poured into the metro area over the course of the last 5 years. To the shock of much of the audience, Canada is largest foreign investor in Los Angeles, and the United States as a whole. About 50% of class-A buildings are the result of, or supplemented by Canadian investments.

Homelessness was cited as the final “H” in Horne’s dialogue. Los Angeles a city with approximately 58,000 homeless residents on any given night, has often been described as “ground zero” for homelessness in the United States.

 “This situation is here for 2 reasons, we are not passing the correct laws and also it’s a real estate issue, pure NIMBY’ism,” he said. “No one wants to see it.”

Horne has taken this issue on as a corporate social responsibility initiative for CBRE. Regardless of any private efforts, the homelessness crisis must be solved at the legal level through cooperation of local governments.

California’s New Direction

Larry Kosmont, chairman and CEO of Kosmont Companies continued the conversation by noting that many of the trends identified by Horne currently affect decisions made by California real estate and development professionals.  

“It’s a very complicated and diverse economy, which is exciting,” said Kosmont. “The reality is that California is looked at as place that seems to want to make changes, and do it right, but doesn’t always get it right, however, this is a common characteristic of any leader.”

Kosmont Companies is a real estate, financial advisory and economic development services firm offering a full range of services for both the public and private sectors.

“We are always at the convergence of public and private transactions, it’s an interesting perspective as to how public and private investment work, whether it be collaboratively or competitively. In our state, there is a little bit of both in the equation,” said Kosmont.

Kosmont pointed out that policy makers in California are taking our state into a green economy.

“As real estate investors, we need to get on board with this idea because these ideas are not going to go away,” said Kosmont.

Much of the sustainability-minded changes are driven by Millennials, who are also having less children, meaning demographics in our state are changing.

“California is also getting older, we don’t have as many children here anymore. We import and we transport,” said Kosmont in reference to California’s youth and workforce

Economically, the middle-class in our state is shrinking as the affordability crisis deepens. Our new governor, Gavin Newsom is prioritizing housing, homelessness and healthcare. Kosmont feels that our current balance is not sustainable to continue growth in our economy.

However, there is no single solution to solving this problem. Our state needs more housing, but housing trends are changing. Urbanization is taking a different form.

“Millennials want an ‘urban suburbia’ where they can walk freely, but also have access to good schools and other suburban comforts,” he said.

While Millennials demands might be a driving force for real estate and development professionals today, they are only one piece of the puzzle in our state’s complex economy. While the California Dream may have changed drastically, the idea persists. As our state struggles to deal with a set of complex issues, real estate and development professionals will be tasked with keeping the California Dream alive.


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