Sunny skies and a laid-back take on life may seem a movie fantasy to Los Angelenos these days, at least from an economic perspective, as the battered local economy teeters on the brink of recession.
This story first appeared in the July 24, 2008 issue of WWD. Subscribe Today.
Plummeting home prices, an increasingly tight credit market and high gas and food costs are squeezing the local economy, and experts predict that a recovery is unlikely to come any time soon.
Statewide, the picture is not pretty, with some parts of California already in recession and the downturn expected to continue into 2009, according to the most recent forecast from the Los Angeles County Economic Development Corp.
“The period 2007 through 2009 will be quite challenging for Southern California, and there will be more bad news,” said Jack Kyser, the LAEDC’s chief economist.
The residential housing market collapse continues to drag on the local economy, as DataQuick Information Systems figures for the month of June showed the median price of a home in California plummeted 31.5 percent in June compared with the same month last year. Home prices plunged 29.3 percent in June compared with last year, to a median of $355,000 in six Southern California counties, and the number of homes sold in the region, 17,424, was down 13.6 percent from the same month a year ago — the lowest number of sales since 1988 when the firm began to track the data.
For Los Angeles’ downtown area, the slump is particularly painful, with the pace of development in the area continuing to slow.
Several highly visible mixed-use projects have seen big setbacks this year, with a slew of financing difficulties for downtown L.A.’s residential and commercial development, like Grand Avenue and Park Fifth.
Grand Avenue’s struggles are being closely watched, because the project is regarded as the linchpin of continuing efforts to revitalize downtown L.A. by luring more high-end retailers and residents. The development is to include a shopping center, hotel and two residential towers.
The $3 billion project, the first phase of which was initially slated to open in 2009, has been delayed multiple times due to trouble securing construction loans, pushing the anticipated debut back to 2012. Dubai’s royal family has invested $100 million, but the repeated delays have prompted calls for a review of the project.
Park Fifth, a development that includes 732 condos and 218 hotel rooms, street-level restaurants and stores, has also seen lengthy setbacks, and some other planned developments in the county have been scrapped completely, like Pasadena’s recently foreclosed Ambassador West project, which included hundreds of condominiums and apartments on a former college campus.
“For downtown, it’s always been the chicken-or-egg question with retail and residential, where each one is waiting for the other before they go in,” said Paul Leinberger, senior vice president at strategic planning firm and agency Thomas Taber & Drazen. “There really isn’t a critical mass to support retail yet, and as an area it’s not yet easily accessible to people without a car. The timing is really bad for the projects without cash in hand.”
Carol Schatz, president and chief executive of the Central City Association, acknowledged retailers have been slow to respond to downtown’s population, and with the housing market suffering, the area has struggled to attract marquee stores.
“We’re definitely seeing an impact, but the upshot is we’ll have to create a different environment. You can get Gap or Crate & Barrel-type stores at any mall, so now we should focus on eclectic boutiques and unique stores that fit downtown’s character,” she said. “We were a very hot market, unlike some others prior to the downturn, but now we are caught up in a national event. The retail will eventually open. We have 31,000 people living downtown now, that number has almost doubled since 1999.”
The retail struggle is widespread: Vacancy rates at small shopping centers across the country rose in the second quarter to a 13-year high, and vacancies at larger, regional malls were at their highest level since 2002, according to research firm Reis Inc. That spells more bad news for Southern California retailing, particularly auto dealers and furniture and building supply stores. And local metro areas are expected to see declines in taxable sales in 2008, with Los Angeles dropping by 1.1 percent.
Los Angeles’ entertainment industry is having a rough year too, given the impact of the Writers Guild of America strike, which cost the local economy $2.5 billion.
Other difficulty also looms, with feature film production remaining slow amid contentious contract talks and the potential for a Screen Actors Guild strike that could cost the local economy another 5,500 jobs in 2008.
But despite the mounting woes, there is some good news — projects like AEG’s massive L.A. Live entertainment and lifestyle complex continue to move forward. Central downtown still boasts the highest average wage in Los Angeles County at $66,464, with the Westside in second place with an average wage of $62,169.
The LAEDC report also forecast L.A. County will add 2,300 jobs this year, though unemployment rates are expected to jump from 5 percent in 2007 to 6.2 percent in 2008. The region has some industry sectors that are still growing, such as international tourism, technology, health care and private education. The area’s large population and business base is also increasingly attractive to foreign investment, Kyser said.
“I think downtown will get there, it’s just going to take longer at this point than anticipated, but the effort is still there,” Kyser said. “We’ll recover, it’s just going to be rough going in the short term.”