Nesters Upset the Economy

For many, the best part about college is moving out and enjoying the newfound freedom, but now as graduation nears, how “free” do these graduates want to be?  Since 2007, more and more college graduates have been returning to live with their parents due to the struggling economy; and according to a recent study by the University of Southern California Lusk Center of Real Estate, this trend continues to drive the economy to a deeper sorrow. 

As students transition to move back in with their parents, many industries lose business and income. For example, real estate brokers and sales agents will miss out on commission, less demand for housing is needed, construction jobs are reduced, furniture stores will sell less product, service providers miss out on contracts for internet, telephone, cable etc., and the “paradox of thrift” or cause and effect scenario keeps going. 

While there are couples in their later 20’s and early 30’s starting families, moving out and sparking economic growth, the number of recent graduates moving back in exceeds this group.  On top of that, the median age for “leaving the nest” is rising as the economy worsens. According to the data in the New York Times article, 950,000 new households were created last year, but is significantly lower than 2007 numbers when 1.3 million new households were created.

How do we fix this downward spiral?

While the solution may be as simple as increasing spending, it will be difficult to persuade the 25% of jobless graduates to do so.  But in reality, by holding back spending, the economy is only worsening.  As Robert Reich, economist and UC Berkeley professor, advocates that the middle class is the backbone of the economy and the ones who have the means to spend, need to. Big spending is not what is required but a little bit by a larger group will go a long way. 

The other beacon of hope is that large group of individuals who have been holding back rent checks and saving money.  We can only hope this group of people is nearing the ability to take the leap to purchasing a home.  In order to incentivize this crucial group of potential homebuyers, programs such as “first time home buyer” tax incentives need to make a comeback.  Are you listening Federal Housing Administration?  Let Americans feel safe to leave the nest.  

The Comeback

Remember those gigantic cubes of stores surrounded by a sea of pavement?  Oh yeah…they’re called malls.  Over the last decade, the concept of the enclosed mall has been nearly put on life-support and only to be easily forgotten with replacement by the lifestyle retail center.  The recent trend to create open-air retail centers such as the Grove, Americana, Santa Monica Place and 3^rd Street Promenade have changed the traditional shopping experience but right when people thought enclosed malls were dead, a recent study by the Urban Land Institute begs to differ.  

Since the early 2000’s, the enclosed mall has been in a death spiral, reaching its lowest point in the last couple years due to the take over of new shopping experiences.  The majority of these malls were built during the suburban housing boom of the 1980’s and have remained unchanged for the last several decades but mall Real Estate Investment Trusts (REITs) have decided to spice things up to help spark a comeback.  By taking an unconventional approach to bring in new tenants, who would normally occupy a “big-box” retail store,  Tenants such as Best Buy, Dick’s Sporting Goods and Target are starting to make the move into the enclosed mall. 

So what does this mean?

Well, since the decline of the real estate market in 2007, the vacancy rate for the enclosed mall has risen to over 12% and this in turn caused many major retail anchors such at Nordstrom’s and Cheesecake Factory to relocate to the more attractive and highly visited lifestyle retail centers. With the loss of major anchors, slowly but surely, the smaller stores were beginning to die off, but now with the addition of high volume retailers like Target and Best Buy, daily mall spending has increased to numbers higher than pre 2007 amounts. 

The revitalization of the enclosed mall is also beneficial because it now allows consumers to take part in daily shopping routines in more convenient locations that promote public interaction. As you can see, the addition of the lifestyle retail center has caused a shift in the shopping spectrum, but does not mean that the enclosed mall is going anywhere, well it would be too costly to tear it down, its just now attracting a new customer base. I’m curious to see the long-term effects of having multiple strong retail options available to consumers. 

Safety 2nd

If you live in Los Angeles, you are most likely an attendee of the worst tailgates ever.  I’m not talking about a sporting event pregame party with friends, but rather a different type of parking lot….the LA Freeways.  The 405, 101 and 5 freeways are known for their infamous bumper-to-bumper traffic that can wear you out more than the 9 to 5 work day. 

By 2020, California’s population is projected to increase by 6 million and this traffic, congestion and roadway crowding will only get worse. A green, environmentally-friendly solution is to get people out of their metal gas-powered cocoons and onto their bicycles. 

Los Angeles has been very slow to realize the changing needs of its residents.  The Los Angeles County population is currently about 10 million but most of its infrastructure and roadways were designed in an era when the population was nearly half of what it is today, causing extra stress on routes used by automobile commuters.  

In response to the increased traffic, increased fuel prices, parking difficulty and newly promoted mixed use land uses, more and more cyclists are hitting the streets, but doing so in a space struggle with cars.

Last summer, Mayor Villaraigosa was hit by a taxicab while riding his bike on Venice Boulevard. Other than suffering some bumps and bruises, Villaraigosa was also “hit with the bug” to become a bicycle advocate.  His partaking includes the three CyLAvia events that have taken place and the 2010 Los Angeles Bicycle Master Plan* that was released last week.

*Although named the 2010 Los Angeles Bicycle Master Plan, it was released in 2011.

While the 2010 Los Angeles Bicycle Master Plan is the first master plan since 1975 and addresses many of the needs for today’s cyclists, it leaves out an important component which caused Villaraigosa to become involved in the first place….separation of cars and bicycles. 

The new master plan proposes 1,684 miles of bike routes but roughly two-thirds of those routes will be flawed in the eyes of cyclists.  The issue lies in “bike lane” which is a 4-5 foot wide lane placed to the right of traffic lanes but to the left of the curbside parking lane. 

Cyclists are forced to be in the path of cars attempting to park, opening car doors and exiting the parking lane. Not to mention next to cars traveling at speeds up to 50 mph, given they are following the posted speed limit. 

All it takes is one driver to be not paying attention, on their phone texting, picking up that french fry that fell on the floor or applying make-up, to strike a cyclist. As you can imagine, a 2 –ton car vs a 25 pound bicycle will not be a good match-up. 

Some statements from cyclists at a public hearing held by the Los Angeles Department of Transportation:

“The plan is not designed for us”

“No one asked us what we wanted, even though we are the ones using the bike routes”

Cyclists feel that they were left out of the design process and what they really want/ need for safety is a “bike path” separated from the automobile.  All this would take is some sort of buffer to deter drivers from crossing into the path of cyclists. 

It doesn’t make sense that Los Angeles is placing large amounts of resources to create a master plan that is not safe in the eyes of those using it. Since money is most likely the primary issue with creating such separated pathways, the LA DOT should reduce the amount of miles in their master plan but create routes that cyclists actually feel safe using. 

There is no point in allocating funds to create something that no one will use. If Los Angeles is serious about creating an attractive alternative to the car, they really need to sit down and actually consider the needs of bicycle riders. 

As of right now, sitting in traffic seems more fun than getting hit by an automobile.  Keep trying Los Angeles!

Right of Way

On October 9^th, 2011, the 3^rd annual “CicLAvia” dominated the streets of Downtown Los Angeles. For those of you who have no clue what im talking about, CicLAvia is an annual event in which cars, trucks, buses and motorcycles are temporarily removed from a designated segment of streets and are open to the public to ride their bikes, rollerblade, run or walk and essentially enjoy the urban streets in a way not normally imaginable. 

Even only in its three short years in Los Angeles, the event has been a huge success in attracting people of all ages.  This concept first originated in Bogota, Columbia 30 years ago as a response to traffic congestion and pollution, but is that all CicLAvia means to Angelinos?

Not quite. Not only do Angelinos participate in this event to enjoy motorized vehicle traffic-free streets and as a breath of fresh air, but use it as a way to fight and stand up for their rights as cyclists and pedestrians. 

Over the last several years, we have seen an increase in cyclists in result to increased traffic congestion, increased fuel prices, and growing mixed-use lifestyle making its way in Downtown Los Angeles, but these individuals are doing so at a high risk. While the city is beginning to realize that there is a lack of bike-friendly pathways in Los Angeles, and the high liability of mixing cars and cyclists in the same lanes, their solutions are nothing more than mediocre. 

Most of the city’s plans simply consist of a reduction of driving one lane, and adding in a 5-6 foot wide bicycle lane either to one or both sides of the road.  As a cyclist myself, I feel that these plans are not sufficient.  In order for cyclists to feel safe on the road, they have to be separated from cars and trucks.  While I do understand that this is a difficult task is such a built-out region, but an addition of some sort of physical barrier other than a painted line should be included. 

If Los Angeles wants to further increase and promote cycling as a form of transportation, the city needs to provide safer options.  I consider current plans such as Spring Street to be a start, but further thought needs to be considered on creating successful projects.

Responsible Modernization

Times are changing and so are the driving forces behind each generation.  The youngest generation, the Millenials, are driven by technology and efficiency, and require facilities such as schools and workplaces to be modernized in order accommodate their lifestyle. 

In 2001, the Los Angeles Community College District, LACCD, felt the need to upgrade their campuses to revitalize current infrastructure and construct new buildings with future generations in mind. In doing so, the on-going $5.7 billion project has managed to become a spectacle of thorough investigation by many news outlets, including the Los Angeles Times, to determine if they have been wasting tax dollars or if the “green” projects across their 9 campuses were ahead of their time. 

The real question is not whether they frivolously spent money, which they have, or if the plan was unrealistic, but what allowed this costly mistake to happen?  The problem was a result of poor oversight and the lack of proper procedures and regulation.

The issue should have first been known when the 7 members on the board of trustees were accepting guidance from the very contractors who stood to make a profit from their decisions. Contractors such as FTR International and URS Design were amongst this group and have been long time donors to the LACCD board, so why not trust them, right?

Well, that’s where the issue started.  The LACCD decided to reject construction bids from several construction firms to allow FTR to head the project.  Not only did FTR “win” the bid, but they ran the show.  FTR demanded money up front, worked on their own schedule, caused millions of dollars in damages due to shoddy work, and on top of that, sued the LACCD for over a million dollars. 

The issue escalated to this level due to a lack of oversight and the ignorance of proper hiring procedures. Larry Eisenberg, executive director of facilities planning and development at LACCD, stood to benefit from the contracts awarded to the construction firms who were donors to the LACCD, rather than hiring contractors based on experience, capabilities and previous track record.

Successfully completing a project of this magnitude requires strict procedures and regulations to protect the intended outcome.  In this case, it was easy to see that the focus was not on providing the greater public good, but instead to help those few groups involved.

It seems, that more often than not, when local governments are faced with large public projects, some sort of scandal arises. 

The solution: follow the footsteps of the Federal Government.

The Federal Government is king when it comes to procedures and yes the long, lengthy, and lackluster procedural documents are often advantageous.  In order to prevent such problems like those that arose between the LACCD and the “qualified” contractors, the General Services Administration, GSA, implements the Federal Acquisitions Regulation, which serves as standard for federally managed projects.

The Federal Acquisitions Regulation puts forth a couple simple procedures and regulations that could have prevented such a fiasco. 

     1)Advertise construction opportunities

     2)Award the contract on predetermined weighted factors

By advertising the construction projects, a larger group of contractors could have bid on the project, other than the few that had some relation or another to the LACCD board members.  This eliminates the conflict of interest aspect of the bidding process and in result prevents this type of scandal. 

More importantly, “award the contract on predetermined weighted factors.” This mandate requires all contractors to register with the GSA, and pass a background check which examines the contractor’s capabilities, track record of prior projects, their ability to adhere to budget and lastly disclose any relation to the parties involved in the project. 

If simple measures were taken by the LACCD when formulating the search for possible contractors, a majority of issues would have been avoided.  The call of greed and rule bending to narrow the playing field probably seemed like a fail-safe idea in the eyes of the LACCD members, but look where it got them. With the addition of proper oversight and the implementation of procedures and regulations in the hiring process, the LACCD community college project could have very well been successful.
 
Maybe its time for local government to look up to Uncle Sam for advice.

Real Estate Perspectives

For those of you looking for some interesting Op-Ed pieces, check out these articles:

- White Picket Fence? Not So Fast

- What's Blowing the Real Estate Bubble in China?

- Executive Action to Ease the Foreclosure Crisis?

Back to the Center

Last week I discussed the future of office space and how companies are now catering the work environment based on who is occupying it, the Millenials.  As a follow-up, I discovered that companies are not only converting their current spaces to plan for the future, but they are now making the move from the suburbs back to urban cities. 

“This is a real trend, and it’s driven by the best way to recruit the Millenials”

In the 1950’s, the future of quality living was seen to be in the suburbs, but as the generation who thought the American Dream was to live in a nice neighborhood and own a home with a large yard (the Baby Boomers) is retiring from the workforce, where does the future of employment lie? It lies in the CBDs, the Central Business Districts.

Companies who are making the move from the sprawled and decentralized business parks of the suburbs back to the city’s urban core have two main motives:

1)       Shred surplus space

2)        Locate to where the labor is

As previously discussed in Rightsizing Office Space, by restructuring the layout of the office place with a reduced number private offices and assigned work spaces, companies are able to reduce the average work area per employee from 200 sq ft to 50 sq ft.  The end result is less required overall square feet, which means that they could now afford to occupy smaller or higher quality places in downtown locations.

According to a study by ULI’s Industrial and Office Park Council, the Millenial generation, 17 - 34 year olds, prefer urban lifestyles which have access to mass transit.  The place that accommodates the lifestyle sought by many Millenials is the urban city environment.  Since the Millenial generation is set to make up over half the workforce by 2014, the companies looking to hire the new talent want to be accessible.

What does this mean for the real estate world?

This trend has made a start to revitalizing the urban core of our cities, but did it at the expense of the suburbs.  The vacancies of the CBDs have been reduced to 15% and suburb office space vacancy has risen to just above 20%.

There doesn’t seem to be a “win-win” option available when it comes to real estate and job growth in this current down economy, but lets hope that the newfound investment of downtown can provide the jobs that recent or soon to be college grads are in search of.