Will there be real estate opportunities in the Palisades area of California after the fire? What is the current state of the real estate industry, and what is the outlook for 2025? Pike Oliver, a real estate veteran in master-planned communities and co-author of Transforming the Irvine Ranch, shares his insights.
Tell us a little bit about yourself.
I've been working in the realms of regional planning and mostly master-plan community development for about a half-century. I started my professional life being trained as an urban planner, a policy and economics-oriented planner. I came into an opportunity to join a company that was involved in large-scale master-plan community development, the Irvine Company. This is the subject of the book that my colleague, Mike Stocks, the one I researched, wrote, and published two and a half years ago now, and we're working on the second one.
After some time working on several large projects in the US and abroad, I became involved in more of an entrepreneurial focus with several partners, and then about 15 years ago, I got involved in teaching at the university level. And I did that for a while, as well as work for some family offices. And now, I do mostly research and writing and some volunteer work, working with the League of Women Voters on a housing policy for the local area here and also involved with some of my long-time colleagues in some Los Angeles area fire recovery.
How do you think that is impacting real estate professionals that are related to rebuilding in the area? Are people flying in from other states or cities to get that kind of business?
I do know that there have been some folks who are looking to potentially acquire sites that maybe people whose homes were burned are not interested in reoccupying, and there are pluses and minuses associated with that. Some of the folks are coming in with low-ball offers and trying to take advantage of the distress. On the other hand, I heard of a lot that burned in the Palisades area and sold for a million dollars the other day, so that doesn't sound like too much of a lowball offer. A lot of things are involved in real estate; there's the good side and the bad side. As far as opportunities, there will be opportunities to rebuild, but it's challenging because of all the individual ownership of the residential lots. Whether there are large-scale opportunities, that remains to be seen, and there's a lot of work to be done in clearing the sites, certifying them environmentally, and doing all of that. That's just getting underway, and it's going to take some months to get that all squared away. There are several issues associated with fire insurance. We've seen a lot of concern about that. California is probably going to have to look at how it regulates that, perhaps a little more liberally, as far as allowing for rates to essentially pay the true cost of providing the insurance.
There's still a lot to be seen as to what emerges in terms of the infrastructure requirements and solving some of the problems, particularly in the Palisades area. There's a real problem with evacuation. That said, I think there are probably some fairly modest improvements that could be made to improve that, and that would be important to do before things go too far along, and rebuilding to get that squared away. Figure out who's going to pay for that. Get that done so people don't get stuck as much in the future and where there is a clear path for the emergency people to prescribe, for people to get out. There are probably also some improvements that may need to be made over in the Eaton fire area in the Altadena community, but the roadway network over there is a little more robust in terms of having more connections in and out, so there's less of a challenge with that.
There are other challenges in the Eaton fire area, just as far as the nature of the community. It's a less wealthy area. You have a lot of homes that are passed down through generations of families and did not have mortgages on them. When you have a mortgage typically, your mortgage company requires you to have fire insurance. When you don't have a mortgage, there's no requirement for that, and I think some people were taking the risk that they wouldn't need it to avoid the cost, and that's going to create a very difficult situation for those folks to rebuild.
I saw in your newsletter that 15,000 homes burned, which is very sad. And I also heard that the city is requiring some low-income housing. I'm wondering if that is true. How are they going to get all these contractors to get these homes built on time?
As far as the issue of low-income housing, there's always a need for that. But most of the housing that burned is single-family housing, and so, by and large, they're not sites that would be appropriate for a massive amount of higher-density apartments. On the other hand, there could be some blocks where maybe a group of people who were burned out decide they don't want to rebuild. That could be assembled into a larger site and then maybe become an opportunity for some more intense use, but that will be challenging to assemble those sites. It will also present some planning and regulatory challenges for the jurisdictions involved.
My personal view on that is probably not a lot of that is going to happen. The group that I've been coordinating with, which is a group of long-time older planners who have been through these events in Ventura County and up in Sonoma County in past years. But their experience was obviously on a smaller scale than what we're coping with in Los Angeles now, but most people rebuilt. And in fact, there was one large subdivision in the Santa Rosa area, I believe it's called Coffee Park, which was something like 1,400 single-family homes. And that's all been rebuilt since 2017, and that was a situation where production builders got involved in working with many of the owners to build homes that were very similar to the ones that had been burned. They were able to achieve some economies by having a larger scale operation.
It's a little different in Palisades, Perea, and Altadena. In Altadena, the homes, except for one project that I worked on in the 90s, were much older. Many of them are 100 years old, 80 years old. You know, 1920s, 1930s, 40s, into the 50s. The good news is when they're rebuilt with current building code standards, they'll be a lot more fire-resistant. The challenge for a larger scale involvement of say, production builders, is a little different matter to replicate homes of that older vintage in current time.
What are some trends for the year coming from your newsletter? There is improved sentiment regarding potential stabilization of real estate and also some top markets to watch. What have you been keeping up with regarding what you think is coming up in 2025?
I always like to say that I have no high-definition crystal ball. All I know is what I read from people who are more expert at this sort of thing than I am. I think we're probably past the most challenging adjustments coming out of the COVID period. And there has been a lot of question about inflation and interest rates. I think one thing we have to always keep in mind is that what the Fed does fundamentally affects short-term interest rates. Long-term interest rates are kind of a different matter, although influenced. Just everything that's going on with policy. I wouldn't be looking to see a return to the very low interest rates that we had up until the pre-COVID period. I think that's behind us now.
The positive thing is we've had a few years of higher rates, although, by historical standards, in my career lifetime, not all that high. I think that the market of consumers now is going to be more accustomed to interest rates in the 6.7% realm, less put off by it, and people's lives change. Their families change. They have a need, and they're not going to wait forever to act upon that need if they can afford it.
The residential markets will see some stabilization and probably an expansion of demand in other areas like Office. There are still some open questions about a return to offices, and there are even some potential federal impacts if Musk and his wunderkind start slowing down the General Services and Administration Office inventory. Although that would impact primarily the Washington DC market. But there are federal offices all over the country, so there could be some impacts from that. Retail seems to have stabilized in many ways, to me, surprisingly. So, although we are seeing something that I thought would happen maybe a little sooner than it has, now I am finally seeing older, underperforming retail centers being converted to housing or a mix of housing and retail. That presents some great opportunities for well-located residential rather than having to sprawl out into the far suburbs and that sort of thing. I think we're going to see more of that, not only in this year, but just in coming years in general.
I've heard on a couple of the points you touched on that. I have a friend who is a realtor in the Bay Area in Silicon Valley, and she has to call and knock on people's doors to see if they know anybody who wants to sell because she has buyers, but there are no available homes.
That's the continuing problem of what, do they call it, the lock in factor. The people who have lower interest rate mortgages from four or five years, they're in the 3% range, some of them, and so they may have the means to move. But then they look at, "Well if I get a new mortgage, I'm going to be paying an interest rate that's 50 to 80% higher than the one I have. Do I want to do that?" That has put a lid on supply, and that's exacerbated the supply-demand relationship with a choice but usually results in upward pressure on prices, even in these very expensive areas. Baker is probably a prime example, Southern California as well as the Seattle area, and some of the larger East Coast cities, as well.
The government real estate do they mostly own or rent? And how do you think that will affect them because now they have to go back to the office. But I also understand that they have a lot of real estate that they lease just to have it, just in case, and it's vacant. I have seen those offices that are completely vacant, just in case. How do you think that will affect real estate, and will that balance itself out?
Over time, it always balances itself out. But part of the question here is what is the motivation in terms of the Doge folks and what they want to do with real estate assets both leased and owned? I don't recall right off the top of my head the precise percentage of federal employees that are fully remote, but it's fairly small. I think it was not much more than the 10% range of, say, about 3 million federal civil service workers. And there'll be an impact on those workers, and many of them live quite a distance from offices. So, coming back to the office will be a challenge.
It seems like part of this is designed to discourage people from wanting to work for the federal government. I've heard from several friends who are involved more closely and working with federal office leasing that there's an intent to, even with the people that are already in the office, squeeze them in more tightly and make it less desirable to work in a federal office, so that it would encourage them to resign and leave the government. I haven't seen any specific quantitative calculations on that, but that could be a big factor, and that could result in a lot of reduction in leases. I don't know, offhand, the precise balance between lease space and owned space. There is quite a bit of lease space. But again, this strategy could go on in both spaces. They could be collapsing people into small work areas, both in the owned and leased office, and putting that pressure on people, making it not all that pleasant to go to work every day.
Pike Oliver
news.ares.org
pike@urbannexus.com