Downtown could be Los Angeles’ next suburb. Not in the negative way that suburbs are commonly viewed, with sprawling development and isolated uses, but in the old-fashioned way, as a new residential community suffused with hope for the future.
Where Can the Housing Go?
In 2000, the City of Los Angeles Housing Crisis Task Force estimated that 8,000 new housing units need to be built in the City each year to accommodate population growth. Fewer than 2,000 housing units were built in 1999, and in the first half of last year the City issued building permits for 4,900 multi-family units, even with a boom in demand. The challenges to building this housing are many, but one of the most obvious issues is “where?”
Though more than 400 square miles big, LA is largely a never-ending stretch of single-family home neighborhoods. None of these communities, from the most blight-stricken to the wealthiest, want to see their neighborhoods transition to a higher density. And with sprawl reaching its limit, higher-density development is the only way to add the housing needed. But higher densities often (sometimes correctly and sometimes wrongly) are too closely associated with bad traffic, degradation of community character, and social ills, such as crime, for neighborhoods to welcome this change.
Downtown LA seems like one of the best answers to the question of “where?” There are over a hundred existing commercial buildings, many (but not all) of them historic, that are drastically underutilized, creating millions of square feet of potential residential capacity. There also are acres of vacant land (mostly used for parking), some of it already assembled into large parcels. Lastly, downtown is already a high-density district. Thus vacant parcels and low-density lots with non-historic structures can be recycled to accommodate at least twelve-story buildings built at densities greater than 100 units per acre. Combined, these circumstances create an incredible opportunity, as well as perhaps the only politically viable one, to meet Los Angeles’ huge housing need.
Despite the exodus of residents to the suburbs in the middle of last century, people continue to live downtown. Today, downtown residents are an assorted mix of business professionals and homeless, working poor and artists, seniors and students. About three years ago, interest in living downtown began to see a strong and broad revival. As new units at Gilmore Associates’ Old Bank District loft project and G.H. Palmer Associates’ Medici not only came on-line, but rented, residential developers began to take note of a business opportunity and residents of a new lifestyle option.
These projects, in combination with the adoption of the Adaptive Reuse Ordinance , have sparked a huge jump in the number of housing units in development downtown. The City’s Planning Department estimates that 22 residential conversion projects, totaling about 3,400 housing units, are in some stage of development. In addition, developers have proposed anywhere from 1,500 to 3,500 units in new buildings. Assuming a multiplier of 1.5 persons per unit, the conversion projects alone would increase downtown’s population by 5,100 people. Although an apparently small figure, it would boost downtown’s population of 22,500 by 18%.  In addition, it is presumed that at least a super majority of these new residents would be middle income, which would significantly change downtown’s income profile, almost 30% of which is now very low-income.
Housing, as it has been in so many other centers across the country, is the primary key to transforming downtown Los Angeles. More residents mean a bigger market for other uses ? retail, restaurants, entertainment, and office – spurring further growth and investment. Also, residents, especially those with higher incomes and education, tend to demand higher quality city services and improvements to infrastructure, leading to a better physical environment. An attractive neighborhood with amenities will be a draw for even further housing demand, and downtown LA at last will have its evasive renaissance.
Will it Work?
The potential for downtown is amazing, but the economics are tricky. Property owners are selling buildings for about $20 to $30 per square foot (psf) of building (with some asking up to $60 psf), not the $6 psf paid by Gilmore four years ago. Although rehabilitation needs can vary substantially from one conversion project to the next, construction costs are relatively fixed (about $45 psf for owner-builders and over $75 psf for developers who hire general contractors and pay prevailing wages). So if construction costs are fixed and acquisition prices are rising, the result is increasingly inflated rental rates in a market with limited supply. Which could kill the whole thing.
Downtown Los Angeles possesses much potential as a living environment. The City Center (west of San Pedro Street) is a traditional, pedestrian-oriented urban place with tall, densely built buildings, continuous street walls, ground-floor stores and varied architecture. Its historic buildings lend it an alluring richness, both physically and psychologically. And it offers national-caliber cultural resources, from the Lakers to the Philharmonic to MOCA, for ordinary use. These features not only imply convenience (travel on foot!), but an appealing urban lifestyle that has been missing in Los Angeles for decades.
Despite these features, however, there is much to downtown’s present condition to make potential residents hesitate. The area lacks commercial amenities, like grocery stores, and everyday, affordable entertainment, like bars, movies and restaurants. It still feels unsafe to walk at night due to drug dealers, homeless and the general absence of business activity.
Plenty of hardy folks could bear up to these circumstances. They are willing to shop in Boyle Heights or drive to Pasadena to get to Trader Joe’s because downtown is an amazing setting in which to live. But is environment alone enough to ask tenants to pay projected $1.50, $1.60, or in some cases over $2.00 per square foot rents?
Downtown is a perfect urban residential community and, with patience, it can work. But it’s a lot to ask someone paying $1,500 for 800 square feet to invest the patience and commitment to make it work. At those rents, residents expect to walk to a nearby restaurant. Downtown is a transitional community and its rents should reflect its current lack of amenities in order to attract new residents.
The rents proposed for the 3,400 coming units need to be lower. More affordable rents will make it easier to attract and keep tenants, which will speed up further investment. Lower rents also will help attract conventional financing to the projects, which to date has been lukewarm. To make rents more affordable, the public sector, most likely the Community Redevelopment Agency, should subsidize these projects with grants or forgivable loans that fill the financing gap created by dropping rents from “market” (i.e., those that make the project pencil) to “affordable” (i.e., those that are accessible to moderate incomes) for an interim period.
A subsidy for for-profit moderate-income housing raises flags from all corners. Affordable housing advocates cringe at government support for moderate-income housing, when the needs of low- and very low-income households are so severe and can only be addressed with more public-sector resources. For-profit developers dislike both the conditions and the hassle of borrowing from a government agency. Everyone fears that a subsidy will just raise the price of properties and end up in the hands of greedy sellers. However, the private sector should not be expected to undertake the challenge of downtown re-use all on its own. Given the widespread public benefits of an affordable residential community downtown, the participation of government is entirely justified.
Public sector financing for downtown housing is what is needed for success. Affordable housing advocates would ultimately benefit because in a redevelopment area a percentage of the housing must be affordable to very low-income households. Though often difficult, government financing could be the thing that would allow developers to actually realize and succeed with their projects. In other words, it just may be the price for bringing life back to downtown, partially addressing the City’s housing crisis, and protecting neighborhoods across the City. Just as it provided infrastructure improvements and housing loan guarantees to build the outlying suburbs, the government once again must apply its resources toward directing growth than can offer the Southern California dream of a decent, safe community in what was once no-man’s land.
 The City of Los Angeles adopted the Adaptive Reuse Ordinance in August 1999 to facilitate the conversion of older commercial buildings in downtown to housing by eliminating planning regulations and providing a performance-based framework for building and fire codes.
 For this article, the boundaries of downtown are generally defined as the 110 Freeway (west), the 10 Freeway (south), the 101 Freeway (north) and the LA River (east), encompassing census tracts 2062, 2073, 2074, 2075, 2077, 2079, 2260, and a portion of 2240.