Vegas Tower Breaks Glass Ceiling of $1,500/sq ft

Three penthouses in Las Vegas' Harmon Hotel, Spa & Residences have closed at prices ranging from $1,500 - $2,400/sq ft, a new record. Units are in one of four high-rise developments in 76-acre MGM CityCenter, cited as being the most expensive private development in the U.S. (Last August Dubai World invested $2.7 billion for a 50% stake in the project.) Promoted lavishly even by Vegas standards, the MGM CityCenter has a sales office described by the Las Vegas Sun as "Disneyland for the competitively acquisitive. The Cirque du Soleil of open houses. Architects Gone Wild."

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Mortgage Watch: Regulators Speak, Magic 8-Ball Portends Lower Rates

Yesterday, two indicators emerged signaling that mortgage rates will trend down in the near term. Federal Reserve Chairman Ben S. Bernanke reported that "the economic situation has become distinctly less favorable" and the central bank "will be carefully evaluating incoming information ... and will act in a timely manner". Market pundits have all but equated this with a 1/2% cut in the federal funds rate -- the interest that banks charge one another for short term loans -- at the central bank's March 18 meeting. On another front, federal regulators have lifted the $1.5 trillion cap on mortgages that Fannie Mae and Freddie Mac may hold on their books. This second measure, coupled with the proposed regional increase in the conforming loan limit, will increase the pool of loans the giant mortgage buyers can buy, reducing home loan rates. Locally, the relief couldn't come too soon -- the National Association of Home Builders and Wells Fargo declared Los Angeles County the nation's least affordable housing market.

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William Morris Ankles El Camino Drive

Venerable talent agency William Morris plans to decamp from its current digs, three trophy properties located at 150 S. Rodeo Drive and 150-151 S. El Camino Drive in Beverly Hills. The buildings are located in the Beverly Hills "Golden Triangle", an area of top-shelf office and retail, where vacancy hovers at a punishingly low 2.9%. Unlike CAA, which bailed from its long-time Beverly Hills home, WMA intends to remain in the 90210 and has hired architectural firm Gensler to develop a green building with recycled materials and energy-efficient water and lighting systems on Beverly Drive. Green is good, but the true challenge will be reprogramming talent agents to eliminate first class air travel, Ferrari driving and Evian water consumption in order to reduce the company's carbon footprint.

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Hooray for Hollywood 90028!

There's evidently more excitement outside the Kodak theater than inside -- the Hollywood neighborhood has been tapped the "single hottest sub-market in Southern California". Despite economic uncertainties, office, retail and residential projects backed by the nation's biggest and strongest developers launch forward. Major projects include a 400,000 sq ft mixed-use development at Hollywood Boulevard and Selma Avenue, which will include 300 apartments over a Whole Foods Market. Trader Joe's won't be far -- across the street on Vine, the trail-blazing grocer will set up shop on ground floor of the W Hotel, which will include 350 apartments, 150 condos and 80,000 sq ft of retail. Retailers such as Tesco, Urban Outfitters and Zara have all signed leases in the area; others, such as Nike, Electronic Arts and MySpace are being courted by property owners. With its tent-pole projects, its indie spirit, its excellent slate and its A-List talent, Hollywood 90028 is destined for a banner year.

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Renters Feel the Pain

The ascent of rents in Los Angeles marches on unimpeded despite (or perhaps because of) the languid housing market. As of the 4th quarter of 2007, tenants ponied up an average of $1,695/month in Los Angeles County in larger apartment complexes, according to Realfacts. Analysis of data on Rentslicer reveals the average monthly asking rent for a two-bedroom apartment on the market in the last 90 days is: $4,463 (Beverly Hills/West Hollywood), $2,894 (Santa Monica), $2,830 (Venice), $2,223 (Los Feliz), $2,107 (Silver Lake), $1,903 (Echo Park) and $1,422 (Highland Park). Fewer homebuyers means more renters, which translates into higher rents.

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$2,700/sq ft in Century City

A 38th floor condo in A. M Stern's the Century, under construction on Avenue of the Stars, fetched a whopping $2,700/sq ft, a new high for Los Angeles, reports the LA Times. The previous record was an underwhelming $1,700 sq ft for a unit at Doheny and Sunset in West Hollywood. The buyer should reserve all hubris as the $15 million price is a pittance compared to the $30 million penthouse currently on the market.

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Part II: $729,750 Conforming Loan Limit

It's unclear whether the increase in the conforming loan limit in high cost areas will be the anticipated panacea for the beleaguered housing market. The securities industry's biggest trade group recommended that the new "maxi" conforming loans (in the $417,000 to +/-$729,750 range) be segregated on the secondary market from the under-$417,000 loans. Because of their greater perceived risk, these "maxi" conforming loans will likely have higher interest rates than current conforming loans, muting their benefit to buyers and those refinancing. On a positive note, those who qualify under their more stringent underwriting guidelines will enjoy more lenient terms (e.g., 5% downpayment) that are intended aid first-time buyers. Expect resolution soon: the Department of Housing and Development (HUD) has until March 14 to revise the loan limits.

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Commercial Perspective -- 2008 Real Estate Investment Outlook

Cap rates that are coming down to earth and a market where cash is king are two highlights of Deutsche Bank Group's "2008 U.S. Real Estate Investment Outlook and Market Perspective". A few key points:

"Overview: During the past few months, most properties traded were at pricing and terms 5% to 10% below those achieved during the first half of 2007....We believe that pricing has adjusted sufficiently that core real estate, purchased in early 2008, can achieve attractive unleveraged annual returns of between 7.5% and 8.0%."

"Effective cap rates increased about 25 to 50 basis points over the past six months as property values decreased."

"The Property Markets: Primary consideration should be given to those metropolitan areas where economic growth should be strongest. The strongest markets have high exposure to international financial and professional services, defense, trade, medical and high-tech industries. Such 'Globally-Linked' markets should achieve particularly strong economic growth...They include... Los Angeles."

"Apartments: Supply constrained markets with low housing affordability will continue to outperform affordable markets, such as ... Los Angeles. In fact, we expect a widening bifurcation in performance between supply constrained and most low barrier-to-entry markets."

"Apartment Transaction Market: The weighted average cap rate was a low 6.13% compared to 6.08% last year. Cap rates in the top tier markets are holding firm, while some decompression is occurring for lesser quality assets in secondary markets."

"Industrial Properties. Gateway markets continue to be the most resilient to the economic slow down with foreign trade and high tech as the key drivers for the sector. Major land-constrained port markets, such as Southern California ... will continue to outperform."

"Industrial Property Transaction Market: Although the first three quarters [of 2007] had been particularly strong, turmoil in the credit markets interrupted potential deals and caused transaction volume to tumble. A flight to quality and fewer deals has allowed average cap rates for warehouse and flex properties to remain low, but a pricing correction is becoming apparent as the risk premium (spread between cap rates and treasuries) is widening for both warehouse and flex properties."

"Implications for Investors: With repricing well under way, opportunities are beginning to emerge for acquisitions ... Given our longer-term positive outlook for real estate fundamentals, acquisitions utilizing realistic assumptions should be attractive. Some sellers are highly motivated, and the pool of buyers is currently thin."

The overheated commercial market of 2006 and 2007 is a distant memory in the new paradigm where traditional metrics such as cap rates and cash-on-cash return determine value. Savvy investors are in a prime position to reap leveraged returns of 12% to 17% in value-added plays. Given the recent turmoil in the credit markets, cash-rich investors will be well-suited to buy good properties at excellent prices, as desperate sellers unload product that had been stagnating on the market.

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Century City's "Green Blade" - Jean Nouvel's Glass-Sheathed Tower

New heights of luxury come to Los Angeles in 2009 when French architect Jean Nouvel's $400 million "Green Blade" breaks ground at 10000 Santa Monica Boulevard in Century City. In keeping with the times, this eco-forward, rail-thin building measures a scant 600 ft (tall) x 325 ft (wide) x 50 ft (deep). With private entrances and advanced hydroponics, each residence is designed, according to the architect, "as a home in the sky surrounded by an abundance of plants and flowers." Certain to attract the global elite -- and Los Angeles empty nesters dumping their Palisades and Brentwood mansions -- the tower's 177 units are expected to be priced over $3.5 million. A rival project, 9900 Wilshire, designed by Richard Meier and London's Candy and Candy -- a 252-unit ultra-high-end condo and retail development at the former Robinson-May site, a bauble's throw away -- is certain to attract a similar clientele. Look for bidding wars in 2010, when the unabated demand for Westside luxury housing goes into overdrive.

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Title Insurance Exits Stealth Mode

Title insurance follows loan, appraisal and brokerage as the latest real estate industry segment to come under public scrutiny. Title Insurance protects parties to a real estate transaction (buyers, sellers and lenders) in case issues of ownership arise. In Southern California, the Seller typically pays for a title insurance policy that protects the buyer.

The Wall Street Journal reports how alleged collusion among the major title insurers has resulted in an anti-trust case in the State of New York.

The Los Angeles Times trounces on the industry and details how consumers pay elevated title fees because of kick-backs and side dealing between title companies and brokers and agents.

The California Land Title Association launched a useful website where consumers can compare title insurance rates -- http://www.clta.titlewizard.com/. Increased transparency has resulted in an overall reduction in title insurance rates.

What is not apparent is that many of the title companies appearing in the search are affiliated (for example, the major Fidelity National Financial Inc. owns Ticor Title, Chicago Title and Security Union Title.)

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Sunset Strip - West Hollywood - Beverly Center -- The Great Volume Decline

(click chart for more detail)

This chart reveals how some of the upper market has been effected by the credit crunch, the holiday seasonal lull, and the pall that has fallen over the economy.

Sales volume in Sunset Strip-Hollywood Hills West, West Hollywood Vicinity and Beverly Center-Miracle Mile (MLS Areas 3, 10 and 19) was nearly consistent from April 2006 through September 2007 -- about 65 homes selling on average per month. (The average sale price in these areas ranges from approximately $800,000 to $10+ million, with most sales in the $1 - $2 million range.)

In October 2007, there was a cliff-like drop-off in activity, where in a single month sales volume fell from 62 units to 37 units -- a 40% decline. A further plummet occurred in January 2008, when only 27 units closed. As winter came on, the local real estate market went into the deep freeze. In many markets, this January had the lowest number of unit sales in twenty years.

Part I: $729,750 Conforming Loan Limit

The Coming Boomlet?

As part of the Economic Stimulus package, Congress has enacted legislation that will raise the conforming loan limit to $729,750 in high cost states (from current $417,000) for loans originated through December 31, 2008.

Conforming loan rates are currently at multi-year lows -- approximately 5.5% -- as opposed to jumbo loans (above the current conforming loan limit of $417,000), which hover in the 6.5% range.

Buyers or those refinancing in the $450,000 - $850,000 price range in Los Angeles can expect to see a decrease in their projected monthly costs.

For a $600,000 loan, the current monthly payment (prinicipal and interest) is $3,792 -- $385/month more than the projected monthly payment of $3,407 under the new guidelines.

The current monthly cost of a $750,000 home (with 20% downpayment, principal, interest, property tax and insurance) is $4,581, equivalent to the monthly cost of an $820,000 home financed at 5.5%. Under proposed terms, buyers will have a 9.3% increase in purchasing power.

In the local market, where sales volume has been down 25 - 60%, expect activity for homes under $1 million to pick up as buyers capitalize on their increased spending power.

It's unclear when the new funding guidelines will come into effect. Given that the expiration date on the incentive is December 31, 2008, one can anticipate changes in the near term.

What's also unclear is what the new conforming loan limits will be for 2-,3- and 4-unit properties. Currently the limits are set at $533,850, $645,3000 and $801,950, respectively.

The single family home loan limit increase is $312,750 -- or 75%. This would translate into new conforming loan limits of $934,237, $1,129,275 and $1,429,162, respectively, for 2-,3- and 4-unit properties.

With Los Angeles' strong rental demand, these new loan limits could create an excellent buying environment for duplexes, triplexes and four-plexes.

Consult a lender to evaluate affordability under these new guidelines. Buyers should take advantage of reduced interest rates and the slow market to purchase properties under the best terms since 2005.

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West Hollywood and Silver Lake-Echo Park Market Round-Up: January 2008

West Hollywood (Area 10) – Six homes closed in the West Hollywood area in January 2008, well below the average of 11 closings during January in the previous five years. The market in the “West Hollywood West” neighborhood – the area bounded by La Cienega and Doheny, Melrose and Beverly -- remains “hot” by any standard. Two sales illustrate this trend -- 9015 Dorrington – 2br, 2ba, a high-end remodel -- that sold for $1.80 million ($95,000 below asking) in 8 days and 385 Huntley Drive – 3 br, 3.5 ba, 2,400 sq ft – that sold for $1.925 million ($25,000 above asking) in 3 days. West Hollywood West has established itself as the “SoHo” of Los Angeles – with residences at the forefront of design, at the footsteps of restaurants and high-end retail – and continues to be a magnet for Buyers. With the construction of the Red Building at the Pacific Design Center, the reputation of this neighborhood should only be further cemented.

The average days on market for sales in West Hollywood in January 2008 was 28. The West Hollywood single family home market remains robust in relation to outlying areas. The foreclosure groundswell which has struck the Southern California region has left West Hollywood relatively untouched. The number of Notice of Defaults (NOD) served to property owners’ in arrears in West Hollywood was 2 among the 1395 total records for LA County as of early February 2008.

Silver Lake-Echo Park (Area 21) – Only seven homes closed in the month of January 2008 in the Silver Lake-Echo Park area – a multi-year low. That small number of sales is staggering when compared to the number of closings in Silver Lake-Echo Park during January in the previous five years – 35 closings (2003), 33 closings (2004), 27 closings (2005), 28 closings (2006), 21 closings (2007). Buyers were seemingly on strike in December 2007 and with no apparent need to find a property before the end of the year.

In spite of the small number of sales in Silver Lake-Echo Park and the weak regional market, values in this neighborhood remain firm. Among these sales were two of the Maltman Bungalows (Maltman Street south of Sunset.) The sale prices of $499,000 and $519,000 net to about $1,000/sq ft – a value rivaling the best homes in West Hollywood or Venice. Two of the seven properties that sold in Silver Lake-Echo Park were over $1 million. The median sale price for single family homes has increased for the past two years, trending from $680,000 in Feb 2006 to $735,000 in Feb 2008 – a $55,000 increase – and an annual appreciation rate of 4.0%.

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