Business Update with Mark Lacter

Housing construction bounces back in Los Angeles

KPCC's business analyst Mark Lacter says housing development is rebounding in the Southland.

Steve Julian: There are a number of development deals being cut throughout Los Angeles.  Mark, what's prompting this?

Mark Lacter: Steve, remember a while back we talked about the signs that would indicate an economic recovery was taking hold, and that one of the things to look for are lots of building cranes and dump trucks?

Julian: I do.

Lacter: Well, construction activity is still not where it was before the recession, but it could get there fairly soon - and that's because of those deals to buy and develop property.  One of the bigger ones involves the purchase of the Macy's Plaza shopping mall in downtown L.A.  The Downtown News reports that the sale is in escrow - and that the new owners plan a major overhaul, which is badly needed (the place has been struggling for many years).  On the Westside, a Canadian developer just purchased controlling interest in  Playa Vista - that's the planned community near Marina del Rey.  As part of that deal, the company is taking over 50 acres of land zoned for 2,000 housing units.  (Playa Vista already has 3,200 residences and two million square feet of offices.)

Julian: You even have the developer, Rick Caruso, buying a parcel of properties in the Pacific Palisades.

Lacter: That’s right, and there's other dealmaking, as well.  Now, many of these projects are several years down the road, assuming all goes as planned.  But what's significant is that financing for much of this work is already in place - it's not just a bunch of pie-in-the-sky proposals that'll never get off the shelf.  And the reason that financing is in place is that credit is becoming more available (that's quite a contrast from 2009 and 2010 when lending was pretty much frozen).  Commercial loan applications have increased and bankers have become more upbeat about business conditions.

Julian: Is the funding coming primarily from US lenders?

Lacter: Not altogether, Steve.  Another source of funding has been overseas investors, especially Chinese investors.  They have a lot of money, and they want to put it to use.  Again, the activity is not as widespread as it was before the recession, but these things tend to have a domino effect.  If banks and investors start seeing their buddies take the plunge, they're likely to follow.  So, what you're looking at is an encouraging sign of better times ahead.

Julian: We have a mayor's race in L.A., and voting is in March.  What do the candidates say they can - or will - do to help the local economy?

Lacter: Mostly they’re promising stuff.  Their televised debate over the weekend gave voters a little taste of what they're in for.  Almost all the economic proposals were made in the name of creating jobs, whether it's the repeal of businesses taxes, or a push for solar energy, or making it easier for tech companies to set up shop in L.A.  Now, not to burst any of their bubbles, but the mayor of the city of Los Angeles has never been in much of a position to increase employment in any significant way, and that's not about to change.  But even putting that aside, the ideas simply don't add up.

Julian: How so?

Lacter: You can't just eliminate a business tax without first figuring out how to offset the tax revenue that you would be losing as a result.  And, there's little evidence that business activity will increase so dramatically that it'll make up the difference.  So, the city could actually lose money instead of make money.  The only real way to create lots of jobs in L.A. is for the overall U.S. economy to get better - and we are seeing signs of that happening.  What the candidates really need to tell us is not how to create jobs they're not in a position to create, but how they intend to manage a city government that’s been gutted from budget cuts, especially the elimination of thousands of positions.

Julian: And it isn't just present-day expenditures, is it?

Lacter: No.  Pension and health care obligations are eating into the money that would otherwise be used to fund services.  In fairness, that's a dangerous conversation to have because it means upsetting some important constituencies.  But L.A. government must operate differently than it has in the past – I’m just not sure these candiates have gotten the memo.

Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.


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