Is Hollywood Heading for Crash?

Wave of new condos in area faces soft market.
By: DANIEL MILLER: Los Angeles Business Journal online
The real estate bust has hit the downtown condo market, slowing its resurgence as a hip residential neighborhood.

Now, it appears, the Hollywood renaissance is in line for some lowered expectations.

The crane has been a dominant part of the Hollywood skyline, with more than 1,200 condo and rental units now under construction. Several experts say those units, or at least most of them, likely will be completed on time.

But there’s a big bulge of units further behind in the current development cycle, and they appear to be in greater peril. According to a March 3 study by the Community Redevelopment Agency of Los Angeles, there are 2,121 entitled units and 1,507 proposed units in larger Hollywood-area developments.

“You already know there are a number of projects that won’t see the light of day this year,” said John Given, a senior vice president at Los Angeles-based CIM Group Inc., a major player in the Hollywood renaissance that owns the popular Hollywood & Highland retail and theater project.

Of course, the problem is the tightened credit markets since the collapse of the subprime mortgage industry. It is difficult for developers to obtain financing for their projects. Even when they do, buyers find loans harder to come by.

“The credit markets are preventing people from getting any traction,” said Lew Feldman, a real estate attorney with Goodwin Procter LLP, who has worked on a handful of land deals in Hollywood. “Until that settles out, a lot of folks are going to be putting on a smiley face, but no money is going to be flowing.”

The resurgence of the Hollywood residential market has been remarkable. At the start of the decade, very little condo and apartment construction occurred there.

Impressive as the construction figures are, they undercount the real activity because they don’t count projects with fewer than 100 units, such as CIM’s 63-unit luxury apartment building at the southeast corner of Sunset Boulevard and Vine Street. That project is well underway and should be ready for occupancy by the first quarter of 2009.

Hollywood’s residential market is smaller than downtown’s, where about 7,900 units are under construction. Both Hollywood and downtown have emerged as L.A.’s big and desirable destinations for those who want to live in a high-rise in an urban environment with cultural attractions, quirky nightspots and subway stations.

Some successes

Given said his company is concerned with softness in the condo market, but believes strongly in the long-term viability of Hollywood. Indeed, there have already been success stories. For example, the Kor Group opened its 96-unit Broadway Hollywood condo project last year at the southwest corner of Hollywood Boulevard and Vine Street. There are only a few condos left and many have been sold in the $700 per square foot range, said Tyson Sayles, Kor’s executive vice president of acquisition.

“We are big believers in Hollywood as a 24-hour destination, but that said, projects have to pencil and the short-term economic outlook is a lot more uncertain,” said Sayles. “I don’t think every project will go forward, and that’s OK; it is part of the real estate cycle.”

One of the those developments that has yet to receive financing is a 23-story condo tower at 5925 Sunset Blvd. by Portland-based Gerding Edlen Development Co. LLC.
The established development company has found success downtown with two South Park condo towers and has another on the way. The company bought the Hollywood property in September 2006, but still needs to complete financing for its $160 million in construction and development costs.

Gerding Edlen Principal Tom Cody said the company is close to getting $64 million in equity financing, but acknowledged the process has been slow because of the choppy real estate and finance markets.

“We are actively working on financing, and it hasn’t delayed us because we are (still seeking) entitlements,” said Cody, adding that his company would like to break ground by fall. “But, in this market today you have to kiss a lot of frogs before you find the prince you need.”

Cody said that a year ago his company would have talked to “two or three” potential financing partners, but “now it’s more like 20.”

“The upside is we are finding it possible to put it together because the Hollywood market is so compelling. If it were a project in a marginal area, you could forget about it,” he added.

Market lynchpin

Given the state of the market, all eyes now are on the $600 million mixed-use W hotel project at Hollywood and Vine, a long moribund corner that in its heyday was the intersection of commerce and Hollywood glamour.

The 5-acre project will feature a 305-room W hotel aimed at young wealthy professionals, 143 luxury condos, 375 high-end apartments and 50,000 square feet of retail – all atop a subway stop.

“This is a critical project for Hollywood and the city’s future,” said Los Angeles City Council President Eric Garcetti, who represents the area and believes the project will do more for Hollywood than even the Hollywood & Highland tourist destination.

Dallas-based Gatehouse Capital Corp. and Norwalk, Conn.-based HEI Hospitality LLC are building the condos and hotel. Foster City-based Legacy Partners Inc. is building the apartment units. All are contributing to the retail.

Gatehouse President Marty Collins expects the condo portion of the project to be a tone setter for the market. He said the units are priced in the $1,200-per-square-foot range – high for a large Hollywood project. The company has already begun pre-selling units, which start in the high $800,000s and go up to $9 million for a luxury penthouse.

Collins said he’s not concerned about a residential slowdown despite the collapse of housing markets in far flung areas like the Inland Empire. “Clearly these units will sell for more than anything else that is out on the market. Day in day out, what happens to the subprime market out in Riverside doesn’t really have a tremendous effect on where we are with the pricing band,” he said.

Indeed, there’s a feeling among some developers that since construction on the W project is well under way and there is virtually no chance it won’t be completed, Hollywood will get a boost from it no matter what happens with other projects.

“The whole area just takes on a whole new dynamic. Critical mass is good for everybody in terms of the food and beverage venues and giving a more pedestrian nature to the street,” said Avi Brosh, who heads Palisades Development Group, a Santa Monica developer that is building the long-stay Pali House hotel nearby. He also converted the nearby Equitable office building into condos last year, so far selling about half the 65 units.

“The W is the first pie in the sky project that got done and it’s amazing it is happening,” he said.