Landmark Links June 17th – WTF

Lead Story….  Generally, I try to keep this blog focused on national and regional real estate and economic issues (and strange news out of the swamps of Florida).  Ever so often though, a local story comes up that illustrates the bat-shit-crazy nature of entitlement and real estate development in coastal California and the discretionary gauntlet that developers must run in order to get a project approved.  Today is one of those days.

There is a property in Costa Mesa near our office called the Autoplex Strip Mall.  It’s an older project that was built back in the 1950s or 1960s (I’m guessing) that has several automotive repair shops, small restaurants and gyms as tenants.  It’s a bit of a hodgepodge to say the least.  It’s also at the foot of the John Wayne Airport runway. Seriously, planes are taking off over your head and the runway ends right across the road.  I want to be upfront about three things here: 1) I know one of the owners well but have actually never discussed this project with him (I first became aware of it about a week ago when a tenant was handing out flyers – we’ll get to that later); 2) One of the sandwich shops in the center is a Landmark favorite and we go there at least twice a week – we do not want to see it go; and 3) Landmark is not involved in current or future financing of the property at this time.

Now that we have that out of the way, the center has become financially unsustainable due to the decline of the auto tenants that dominate it, due in part to dealerships incentivising repair services and parts in house.  As such, the owner made the strategic decision around a year ago to process a zoning change and redevelop the property as self storage along with a food hall concept that I believe is modeled after 4th Street Market in Santa Ana.  The owner proposed a sustainable structure that would reduce traffic, improve curb appeal and make the property economically viable in the future.  They also gave the tenants advance notice last August rather than evicting them before the process as many landlords do when they are re-developing.  Groundbreaking wouldn’t happen until at least October, 2017.

On the surface, it looks like the owner did everything right:  he left the tenants in place to give them plenty of time to find a new locations, designed a sustainable, aesthetically pleasing building that provides amenities that the area needs, reduces traffic impact and is economically viable.  But doing things right doesn’t count for much when it comes to the bizarre and often borderline-capricious world of land entitlements in California.  As the Daily Pilot reported, the project lost a 4-1 vote at planning commission:

The Costa Mesa Planning Commission recommended Monday that the City Council deny a proposed 744-unit self-storage project, saying the developers should do more to soften the blow for business owners who would be displaced by the project.

Commissioners voted 4-1, with Chairman Robert Dickson dissenting, to advise the council to reject plans to demolish the 37,883-square-foot Autoplex strip mall at 375 Bristol St. and replace it with a two-story facility with about 98,800 square feet of storage space, plus a freestanding 5,000-square-foot food hall and a 1,200-square-foot management office.

A project getting shot down at the Planning Commission level is not newsworthy in and of itself.  It happens all the time.  In fact, Planning Commission merely makes a recommendation to the City Council and Council then gets the final vote on whether or not the project gets approved.  What is unusual here is why this proposal got shot down.  Again, from the Daily Pilot (highlights mine):

Commissioners repeatedly praised the project’s design but were concerned by the strident opposition of Autoplex tenants whose shops would face the wrecking ball if the proposal moves forward.

“I have a lot of trouble approving this project, not because there are deviations with it or because I think it generates traffic or that it’s too tall, but because I don’t think we’ve done enough good-faith efforts to deal with the ramifications of the project,” Commissioner Colin McCarthy said.

So the Planning Commission denied a project, not because it was poorly designed or didn’t fit the surrounding area but because they had concerns about the existing commercial tenants in a complex that isn’t economically viable.  Apparently the Costa Mesa Planning Commission missed the 8th grade civics class where property rights was discussed.  How did the tenants manage to put so much pressure on Planning Commission?  They put together an organized campaign and were handing out fliers to their customers asking them to write emails to the Commission in order to oppose the project.  I know this because I received one.  But it gets even worse.  Planning Commission actually asked project spokesman Paul Freeman whether relocation assistance had been considered for displaced businesses.  Mind you, this isn’t a situation where a developer is tearing down affordable apartments to build a new tower, displacing long-time residents who can’t afford new housing in the area.  These are commercial tenants operating for-profit businesses in a center that someone else owns that is becoming economically obsolete.  When asked for comment about relocation assistance, Mr. Freeman sounded understandably frustrated:

“We haven’t discussed that and I don’t know what precedent there is for that.  At the end of the day, what do we have? We have a property owner making a decision that the current business model is not sustainable. And what have we brought in? We’ve brought in a project that has less traffic, no variances. It increases the most popular uses, the food, and is a really beautiful building.”

In an added bit of absurdity, commissioners acknowledged that the property owners have a right to redevelop the property (at least they got that part right) but still held on to the notion that the tenants somehow come before that right.  In an email to the Daily Pilot, Mr Freeman wrote that it seemed that the property owners were being

“Effectively punished for doing the right thing. Rather than kick out the tenants immediately and go to the city with a plan to redevelop empty buildings, they chose to give years of notice and promise to pay in the event of early terminations.   The commissioners said they loved the project except they couldn’t support it owing to the tenants’ opposition, which commissioners took as a measure of the owners’ failure to do what they should have done to ‘work things out,’ I’ve rarely seen anything like it.”

 The moral of this story is that no good deed goes unpunished in the wacky world of California entitlements.  Ironically, the landlord would have been better off servicing the tenants with termination notices rather than letting them stay in place while entitlements were being processed, leaving them to effectively organize their opposition.  The leases between the Landlord and Tenant should govern the rights of each party, not Planning Commission which should stick to reviewing projects relative to zoning and design conformance with surrounding neighbors rather than sticking it’s nose where it clearly doesn’t belong.  Hopefully Costa Mesa City Council overturns this nonsense in short order.

Economy

Stuck in the Mud: As expected the Fed didn’t raise rates at their June meeting.  In addition, Janet Yellen acknowledged that the forces holding rates down may be around for a long time, causing the Fed to rethink the anticipated pace of future increases. The 10-Year US Treasury Bond is now at it’s lowest yield since 2012.  See Also: The German 10-Year bond yield dipped into negative territory for the first time on record this week which begs the question: is German government debt riding a bubble?

Wage Rage? Despite the latest blah jobs report, the Federal Reserve Bank of Atlanta’s wage growth tracker is indicating that the labor market is tightening which should lead to higher wages.

Black Box: China’s 134 city commercial banks which hold 15% of the nation’s commercial banking assets are piling into opaque investment products as bad loans are increasing. This financial engineering could lead to catastrophe if credit quality continues to decline.

Residential

End Around: The California Environmental Quality Act or CEQA has long been utilized as a weapon against new development by NIMBY’s, environmentalists and extortionist attorneys.   But developers are fighting back.  Their newest weapon?  The ballot box.

Nowhere Near the Top: Real estate licensees boomed back in the bubble days.  As Calculated Risk shows, despite increasing prices, they are still way down (31.9% for agents and 11.8% for brokers) from the highs.

On the Ledge?  Luxury urban housing is one segment of the market that has performed quite well in this cycle.  According to Chapman University Economist Joel Kotkin, it was largely built on a myth: that wealthy retired Baby Boomers were going to move to urban markets in droves.  In reality, there has been more migration by Boomers to the suburbs than there has to the city even as the luxury urban pipeline continues to expand.  The buyers (and renters) of the luxury urban units are often wealthy foreign nationals, a source of demand that can change based on several factors including capital controls and currency fluctuation versus the dollar.  Foreign demand is waning and Kotkin believes that the luxury urban market will soon be on the ropes. Contra: How an influx of younger, wealthier residents has transformed US cities.

Profiles

Linked Up: Microsoft bought Linkedin for over $26 billion this week in a transaction that may have been more driven by Linkedin’s reliance on stock-based compensation of the than many realizee.  See Also: Why is Microsoft borrowing money to purchase Linkedin when it has $100 billion of cash on it’s balance sheet?  Taxes.

Shake Down Street Vendors: Street vending in NY was once a path to a better life for many immigrant entrepreneurs.  However, the black market for cart permits, spurred on by city over-regulation and limits to the number of permits issued can cost a vendor tens of thousands of dollars a year often traps would be entrepreneurs in a spiral of low wages that’s virtually impossible to escape.

Chart of the Day

WTF

He Who Smelt it Dealt It: A smelly fart in a Key West bar led to a brawl, because Florida. See Also: A Florida man’s flatulence in bed resulted in a can of pepper spray being discharged and the arrest of his wife.

Fairy Tale Romance: Meet the pig and kangaroo who have been carrying on an illicit affair on an Australian farm for more than a year.  I honestly can’t do this justice with words so I’m going to post a couple of pictures.

FAIL: A few years ago, villagers in Xianfeng, China brought in 73 of macaque monkeys to live there in order to increase tourism.  It didn’t work but the monkeys don’t seem to care.  Their numbers have multiplied to 600 and they have now overwhelmed the village, damaging crops and biting tourists.

That’s One Way to Deal with It: A New Mexico man set fire to his apartment to avoid escape his neighbors’ loud sex.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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