Despite Economy, Plans Move Ahead for $1B L.A. Mixed-Use

What recession? Even in bustling Los Angeles, demand for office, condo and hotel space has plunged, but Thomas Properties Group, which was just selected by Korean Air to develop the airline company’s $1 billion mixed-use project in the city, is undaunted by today’s economic conditions and hopeful about the future. Korean Air purchased the site of its future mega-development (pictured), spanning a full city block Downtown at the intersection of Wilshire Blvd. and Figueroa St., in 1989. The 2.7-acre property is located a few blocks from the L.A. Live mixed-use entertainment development and the Staples Center sports and entertainment arena, and is currently home to a complex featuring the Wilshire Grand Hotel. Plans call for the prominent parcel to sprout a 2 million-square-foot LEED-certified complex encompassing a 60-story trophy high-rise–the first green office high-rise in Los Angeles–with nearly 1.2 million square feet of Class A office space, and a 40-story structure offering a premier hotel with as many as 700 guestrooms topped by condominium residences. Architectural firm A.C. Martin Partners is on board the project to handle design responsibilities. Los Angeles, like New York City, Washington, D.C. and other leading metropolitan locales, has not escaped the ravages of the country’s economic crisis and the impact on most real estate sectors is palpable. With more job losses on the horizon, the Los Angeles office market is expected to see the average vacancy rate in 2009 jump to a projected 14.2 percent, according to a report by Marcus & Millichap Real Estate Investment Services. The city’s hotel occupancy rate, while above the U.S. average of 60.4 percent, is still lackluster at 71.3 percent. And with the for-sale housing market in a slump, many condos are being marketed as rentals. James Thomas, chairman & CEO of Thomas Properties, concedes that conditions, particularly in the Downtown office market where the company owns the 2.5 million-square-foot City National Plaza, are presently less than appealing. Where the massive Wilshire Grand redevelopment project is concerned, however, there is a method to his madness, so to speak. “Demand is not what it was, and it may be getting weaker,” he told CPN. “Including our building, there’s 14 million square feet of Class A office space in Downtown L.A., and it’s about 80 percent leased.” If you get to 93 percent occupancy, you don’t have room for large tenants; in large buildings you have large users who need expansion space, so it’s hard to get past 93 percent or so when there’s no room for any large users and no options for users’ expansion. You need 700,000 square feet of new absorption to get to 93 percent. Historically, for these 14 million square feet, it’s been about 300,000 square feet annually so when doing the math, in three to five years, we’re going to need a new office tower to meet demand.” Los Angeles has long been a leading office destination and, despite its growing vacancy rate, it still ranks fifth on Marcus & Millichap’s list of the top metropolitan office markets in the country. And when the real estate market recovers, signs indicate that Downtown could become even more highly coveted. “Large new users could enter the market, especially since Downtown L.A. is becoming increasingly attractive,” Thomas noted. “It’s gone through a transformation. Years ago, it didn’t have residential; now we have residential, entertainment and office. And all major transportation hubs are in Downtown L.A., and the Wilshire Grand site is across from the city’s second biggest metro stop, so for an employer, you can draw on the entire population. You’re in the center so even if you drive, it’s much shorter, or you can live in Downtown or use public transportation. I’m confident that in the next few years, we’ll need a new tower Downtown and I want to be the one to build it.” Timing is everything. Thomas Properties is just starting the Environmental Impact Report process for the Wilshire Grand project. Controlled by the city, that process could take between 12 and 18 months. Thomas said the company does have a rough development schedule in mind. “Our hope is to be able to start construction in 2011 and finish it in 2014.”