March 19, 2007 - From the March, 2007 issue

Cabi Developers' Rich Mayo Offers an Optimistic Assessment of L.A.'s Real Estate Market

As a longtime developer and real estate broker, Rich Mayo has developed a respected perspective on the economics, politics, and business trends governing development and land use in the Los Angeles region. Recently hired by Mexico's Cabi Developers to seize upon opportunities to buy and develop mixed use and infill properties, Mayo shares his evaluation of the current real estate climate in the following TPR interview.

Rich Mayo

You were formerly in brokerage with O'Donnell/Atkins, and now you have joined Cabi Developers. Elaborate on experience with both firms.

On the brokerage side, I had the opportunity to work with many bosses-namely my clients. They were a varied and disparate group of investors looking for all sorts of opportunities.

O'Donnell/Atkins is a land brokerage firm that started about 15 years ago primarily doing large subdivision land sales and then turned to urban infill. The clients of O'Donnell/Atkins are large developers and builders, primarily residential, although focused on mixed use. I came to the firm because of my experience in commercial real estate as a broker, developer, and corporate real estate executive. My main focus was Los Angeles County, and particularly those substantially urban areas of the county.

Your new employer is Cabi Developers, a recent entrant into the L.A. real estate market. Share Cabi's present holdings and US ambitions?

Cabi is a U.S. subsidiary of GICSA, one of the largest developers in Mexico, focused on retail, residential, resorts, office-everything. They're the Hines of Mexico, in terms of a privately-held and diverse development company. They have had a presence in the United States for several years, almost exclusively with water-front prime developments in South Florida in partnership with Turnberry. They have dabbled in the western U.S., but are looking to take it to the next level and capitalize on our financial resources, relationships, and synergies with Mexico and the western United States.

Cabi has great ambitions in the western United States, whether they include existing investment opportunities in office, residential, or retail centers or ground-up mixed-use development. At this point we'd also look to do partnerships with existing developers because we don't currently have the infrastructure here to do ground-up development. But it will evolve quickly.

How does the overall real estate market in Southern California look today?

Overall, the market is still strong. There's a tremendous amount of capital looking for opportunities, and transactions in the office building market are taking place at record prices. Retail is still very strong.

I think residential has cooled off, although maybe not for all the reasons one might think. Some of the large players in residential tend to be publicly traded builders, and I think as they have gone into hibernation it has forced the entire market to cool off for a little bit. I think there's still lots of residential opportunities that private developers and private builders are looking at under the radar. Industrial is certainly a strong market, partly because there's still huge demand by industrial users, and the supply seems to be dwindling.

Which geographic sub-markets are doing particularly well?

In Los Angeles County, the Westside sub-markets-Santa Monica, Beverly Hills, Century City-are at record levels in almost all product types. Orange County still seems to be strong. San Diego's residential market has cooled, but office and retail are doing well.

Downtown L.A. seems to be getting its legs, and with the consolidation of institutional owners who control the Class A space, rents will tick up. Fewer owners will be able to dictate the market. The west part of the San Gabriel Valley-Pasadena, and Glendale-is very strong and stays strong as you go farther east. I haven't focused much on north county, but from a residential perspective Santa Clarita and those areas have slowed down.

About 150 projects supposedly have been in the "pipeline" Downtown for the last few years. What's the status of those projects?

I think that 150 was an optimistic number, and I think probably 12 or 15 were real projects that were going to move forward over the next couple of years. From that standpoint, it's easy to say there's a huge slowdown because that 150 is not going to happen, but I don't think that was a realistic number anyway. Even with the "real" projects, people are stepping back a bit and seeing where the market is going.

But sales of new property have not slowed, and each project that's introduced, and as units are released, the sale prices per square foot continues to go up. I think there's strength in that market; the question is how much depth it has.

No one expected the impact that Staples Center would have on Downtown, but all of a sudden here we are six or seven years later and it's had a huge impact. And I think the same will be true of LA Live and then the Grand Avenue Project. Once LA Live is operating, with restaurants, clubs and theaters, that energy is not going to go away.

Over the past few years, a lot of land speculation took place in Downtown, primarily from property owners that were not real estate people and just saw a chance for capitalizing on a windfall created by a rising market. People quickly drew up plans, but they weren't really real estate developers, in the traditional sense, who could execute a project of any complexity or magnitude.

As things settle down, whether those properties start moving to competent real estate developers or whether they sit on the sidelines, I think there's going to be a lot of separation between the speculators and the real developers and builders.

The phenomenon in real estate over the last few years is that it's not just institutional players; now there's a lot of just wealthy individuals. So much wealth has been created, and everyone seems to funnel that wealth into real estate.

If there's one place where it's relatively easy to secure entitlements, it's Downtown L.A., either because they're already in place or because you don't have homeowners groups or neighborhood associations opposed to the development. So you can all of a sudden have an entitled piece of property for a substantial density and you've created a theoretical windfall.


The issue is, who's actually going to build it? Though there's a lot of capital and a lot of players, there's been a shortage of builders who know how to build the type of projects that are being promoted, such as high rise residential towers or complex mixed-use projects.

The projects that are moving forward are being done by people with experience from outside of Los Angeles. They're being done by people from Canada; Fifield is coming from Chicago; the South Group comes from Portland; Moinian comes from New York. They are outsiders that know what it takes to do true urban residential high rise, and I feel like we have the same capability based on our experience in South Florida, Las Vegas, and Mexico.

What would be an ideal project for Cabi?

I think there are a few kinds of projects. One would be value-added retail centers-neighborhood commercial shopping centers that have opportunities for renovation and re-tenanting and maybe adding some other uses, whether they are residential or office, and creating mixed use out of a tired classic neighborhood shopping center somewhere in urban L.A.

Cabi has strong retail experience and have done a lot of mixed use projects, and we have the patience to pull those projects together. We are also very interested in existing office buildings in strong sub-markets. The other area is major ground-up mixed use projects, particularly with transit. We've done a lot of that throughout Mexico. We're also interested in strategically located residential, probably on a luxury level.

You mentioned some of the markets and sectors that are hot, including industrial. There's a battle going on between some of the housing interests Downtown about re-zoning or up-zoning some of the land Downtown. At the same time, the number of jobs in the city has remained stagnant for the past 25 years. How do you view that debate?

I think that the focus of the debate is misguided. Everybody is focusing on the fact that industrial-zoned land is being converted to another use, and everybody is assuming that the residential developers are taking industrial land out of circulation. My hunch is that the L.A. Unified School District is as big a culprit, if not more so.

That being said, the focus needs to be on the definition of industrial land and how that definition matches up with what true industry needs today. When the industrial zones were enacted in Southern California, industry was different than it is today, and I think that zoning is not consistent with what industry is about.

The hot industrial markets are in the Inland Empire, where large pieces of land can accommodate million plus-square-foot facilities geared towards distribution, logistics and assemblage. Industrial is different in L.A. There are parts of the motion picture industry that is an industrial use, and I'm not sure that the zoning matches up with those uses.

If, hypothetically, you worked for a City Planning Department, how would protect industrially zoned land from predatory housing or commercial developers?

I don't think that a mix of uses, job creation, and housing ought to be mutually exclusive. One of the things that is ignored in that whole debate is the regulatory environment, beyond the planning function. I don't think industrial users have bypassed the central city solely because housing developers are driving up land prices. Rather, the city of L.A. is not the most friendly place in the world to do business for industries, so they've gone to other municipalities in the Inland Empire, San Gabriel Valley, or out of state.

Industrial users are one thing, but assembling enough land to efficiently do something is difficult as well. I don't think we can simply slap on a moratorium and say that industrial is the only thing we can do in a certain place and not allow residential, retail, or anything else unless you look at some of the other things that support industry in Los Angeles.

Should Los Angeles, like Houston, give up on zoning-most specifically for industrial land uses?

I think we need to look at the industrial land uses and find out where there's true, modern industry. Those should be supported. To the extent it's compatible with other uses, that's great, and if not, then they should probably be preserved. But I think there are other areas that are zoned industrial-like on La Cienega near the 10, for example-is that really an industrial area? I suppose it was, but now industrial has turned into auto repair shops and things like that, and I'm not sure that's what we had in mind with the establishment of industrial zones. We should look at those uses and accommodate them in the context of a much wider range of uses. We need to be more selective about our definition of industrial in the modern age.

What role should the City Planning Department play in guiding urban infill development?

I think they should actually plan. I've seen that comprehensive planning doesn't occur; it tends to be in reaction to something that someone has taken exception to. Site-specific planning and negotiation is the result, but it's not within the context of a true plan.

Do Los Angeles developers, and their lawyers, really want comprehensive general plans? Or, do they like City Council's discretionary powers over land use?

I would think that the individual developers would like that. The planning process is currently controlled by consultants, lawyers, and lobbyists, and I think that the City Council and local officials actually like that. On the one hand, you have the planning community that would like to be planners, and then you have the development community, which treasures certainty.

However, the process is being controlled by the politicians, consultants, lobbyists, and lawyers in the middle. I don't think developers support that, but I don't think they see an alternative until somebody takes it on. It's hard to make projects happen and solve the world's problems as well.


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