Rob L. Wagner روب لستر واقنر

Construction Week

Istitmar Invests in Los Angeles Downtown Project

Construction Week (print edition)

By Rob L. Wagner

November 1st, 2008

LOS ANGELES – In the 1980s there was considerable angst among American real estate experts that Japanese investors were elbowing out competitors by buying up prime properties from Los Angeles to New York.

What seemed like a savvy move 20 years ago came around and bit the Japanese on the backside by the end of the ’90s when their economy tanked. Perhaps the biggest blunder occurred when the Mitsubishi Estate Company purchased most of the investment holdings in Rockefeller Center in New York for an estimated US $1.4 billion (AED5.1 billion).

Mitsubishi bought a historic icon but thanks to dwindling renters it never became the cash cow the company had envisioned.

Japanese investors shrank back from such ostentatious real estate deals and only now have made tentative steps to again pursue US properties.

But Japan’s loss is Dubai’s gain as Arab investors are looking to Western nations to invest their wealth. They learned lessons from the Japanese and found that selected equity partnerships in key land holdings and construction projects can return handsome profits. Surprisingly, there is little hand-wringing among American politicians and real estate competitors over foreign investment of American construction projects and real estate acquisition.

The reason? American companies need Arab cash to kick-start projects. A case in point is the $3 billion Grand Avenue project, now simply named The Grand, in downtown Los Angeles, a city with a long history of failed urban revitalisation and piecemeal building that left the civic centre with zero character and identity.

Buoyed by the unexpected success of the Frank Gehry-designed Walt Disney Concert Hall, which was completed in 2003, the city and county of Los Angeles began considering a project that would complement the hall, if not exceed it, by creating a vibrant downtown. The project is situated over a total of 36,421m2, plus a 64,750m2 park, on three city blocks that will include up to 2600 residential units, retail and restaurants and the five-star Mandarin Oriental Hotel, with luxury residences to anchor it.

The Related Companies’ California division under President Bill Witte brought back Gehry, who is currently charged with designing the new Guggenheim Museum in Abu Dhabi, and then sought the Dubai-based Istithmar World as an equity partner. Istithmar provided $100 million, and just recently three Korean insurance companies, under the umbrella of the Honua Group, announced an additional investment of $100 million in the project.

Related now owns 10% of The Grand. Istitmar and Honua own 45% each.

The partnership is hardly unique, but demonstrates a growing pattern of US-based developers seeking Dubai money to get projects on the boards.

As a rule, Istithmar World has been tightlipped about its US projects, but it announced recently that it is opening a New York City office to expand its investment opportunities in the United States. With Istithmar officials meeting monthly with Related Companies project managers on The Grand Avenue project, and presumably on other US developments, it is not surprising that it would want offices closer to the action.

In a statement, HE Sultan bin Sulayem, chairman of Dubai World, says, “Opening an office in New York is a natural evolution of our growing presence in the Americas and demonstrates our commitment and enthusiasm for the region. We already have a solid asset base in the US and Canada.”

In sharp contrast to the Japanese investors of the 1980s, Istithmar takes a longer view, Witte tells Construction Week in a recent interview. He notes that Japan created their own real estate companies and were active participants looking for relatively quick profits. Istithmar’s approach is completely different.

“They come to the table as a sovereign fund,” Witte says. “They look at the longer term view.”

Istithmar is somewhat of a passive investor identifying and investing “major assets in major developments,” he says.

Passive or not, Istithmar has global ambitions to earn significant returns for its investors with a keen eye towards weighing risks. Its most noteworthy acquisitions are buying the high-end Barneys New York for an estimated $825 million in June 2007 and the UK-based Inchcape Shipping Services for $285 million in June 2006. Istithmar also bought for $100 million the luxury ocean liner Queen Elizabeth 2 from Britain’s Cunard Line. The ship comes to Dubai this month to be a floating luxury hotel at Palm Jumeirah.

And, according to the New York Observer, Istithmar paid $705 million in November 2005 for the Helmsley Building at 230 Park Avenue, and then resold it for a whopping $1.15 billion, delivering exactly what it promises its investors of excellent returns with modest risks. It also has a majority share in the Mandarin Oriental Hotel in the Time Warner Center, which is another Related Companies development.

Real estate investment may not be Istithmar’s forte, but it’s a natural step to become equity partners in construction projects. In fact, The Grand project could very well have been doomed when the California Public Employees’ Retirement System pension fund got cold feet and withdrew from the development as an investor. But Istithmar joined Related as an equity partner in December 2007, rescuing the project.

Unlike major metropolitan cities worldwide – from New York to London to Paris – downtown Los Angeles has suffered from an identity crisis since the automobile became the preferred mode of transportation in the 1920s. Although Los Angeles had no subway rail system until recently, city and county leaders allowed the region’s complex rail system to be torn up in favor of freeways. Wilshire Boulevard to the west of downtown became the business center and downtown began its slow death.

The final nail in the coffin occurred in the late 1950s when city officials decided to raze dozens of Victorian homes on Bunker Hill in a misguided effort at urban renewal. The consequences were devastating. The historic homes were

bulldozed; the iconic Angel’s Flight funicular was warehoused and replaced by a mishmash of concrete blocks, tunnels, freeway ramps and uninspiring reflective glass high-rise office buildings. Again, the automobile was given preference over pedestrian-friendly walkways.

Attempts to reverse the loss of foot traffic in downtown emerged in the 1960s with the construction of the expansive Music Center on Grand Avenue. The intention was not only to bring culture back to downtown but allow people to linger about after a concert at restaurants and nightclubs. It never materialised because the only entertainment venue downtown was Music Center.

To further erode these grandiose plans for a revitalised downtown is that the architecture of the Music Center, the nearby County courthouse and County Hall of Administration – all built between 1956 and 1964 in a ’60s version of post-modern architecture – has not aged well.

And therein lies the challenge for Related Cos. and Istithmar: How can the two companies continue the theme of the extraordinary Walt Disney Concert Hall when the park just a block away is sandwiched between two of the drabbest public buildings in downtown?

The good news is there a few existing structures that make downtown interesting and will stand up to Gehry’s radical designs. At the south end of the project at Grand Avenue and Fifth Street is the Central Library with its compelling mix of Egyptian and Art Deco architecture. Three blocks north up the hill is the California Plaza, the 54-storey office tower completed in 1992 and designed with Dubonet granite panels combined with green quartzite inlay panels. The

Plaza also contains the Museum of Contemporary Art and the Colburn School of Music.

Directly north of the Colburn will be the Gehry-designed Mandarin Oriental Hotel and luxury residential towers that will be surrounded by retail businesses, nightclubs and restaurants with an emphasis on pedestrian-friendly access. Gehry’s design promises to rival Disney Hall with a pair of L-shaped towers, one at 48 storeys and the other at 19 storeys. Both towers feature open-air plazas and terraces, open-air balconies and roof decks.

The only fly in the ointment are the neighbouring County courthouse and Hall of Administration that will certainly look to visitors something akin to  sun-bleached barns in the shadow of the Burj Al Arab.

Witte says there is some discussion within city and county circles to tear down the public buildings, which would go a long way towards completing his vision of what The Grand should ultimately look like.

But Martha Welborne, director of the Grand Avenue Committee and who serves as a liaison between the city and county of Los Angeles, isn’t so sure. Welborne, an architect originally from Boston and who vetted Istithmar before it became a partner, observes that early ’60 post-modern architecture has its fans.

“You’d be surprised how many preservationists are fans of this type of architecture,” Welborne says.

Regardless of when the project begins and whether the older buildings will be razed to make way, $1.1 billion is already earmarked for construction of the park. And Welborne sees few obstacles to the entire plan.

“There isn’t much opposition out there because most of the land between the Disney Center and City Hall is parking lots,” Wellborne says. “We are not displacing anybody. There is a lot of support for the project.”

The irony is that after nearly 80 years of failed dreams, it just may be Arab money that will bring downtown Los Angeles back to its original grandeur despite some of its existing flawed architecture. And there is no argument from the joint city-county board, which approved Istithmar as an equity partner in a five-minute vote with virtually no debate.

In the 1970s and early ’80s, the residential population numbered only about 15,000, which failed to accomplish civic goals of creating a vibrant permanent community with nightlife. But the number of people living downtown has risen to about 41,000 today while the residential population with a five-mile radius of the civic center is about 1.1 million.

“Demographically, there is big growth in urban living,” Witte observes. “Baby boomers between the ages of 50 and 65, even  Generation Y (young professionals in their 20s), are seeking a more urban lifestyle. The price of housing is going up and this kind of living is attractive now. It’s (downtown residential population growth) a question of degrees.”

Indeed, the emerging portrait of a downtown Los Angeles resident is a university educated 31-year-old professional with a median household income of $99,000. This is exactly the kind of people Los Angeles officials and foreign investors want living downtown: Young, smart and hip professionals with money to spend.

The time may be ripe to take advantage of urban demographics, but the current global economic climate is anything but good.

Related Cos. lost a bid to the Grand Avenue Authority, the lead public agency on the project, for an eight-month delay in starting construction and was given until February 15 to break ground. If it fails to begin building, the company faces a penalty fee of $250,000 a month.

Related sought the delay because it has failed to find adequate financing.

“Construction loans are not there,” Witte says. “We have the equity but traditional (financing) has shut down. There is a weird liquidity crisis.”

Indeed, last month the Los Angeles Business Journal listed The Grand among a half-dozen development projects that may never see the light of day due to the economic downturn.

Despite the current economy crunch, David Jackson, chief executive officer of Istithmar World Capital, is optimistic that profitable future investment will be found in the US.

“Our base in New York City provides us with a solid platform and hub from which we can build and develop our regional investment activities and network,” Jackson says in a statement.

“The current global market conditions have opened up many windows of opportunity for us. We believe that a permanent presence in the region will provide us better insight into potential investment opportunities in the Americas while enabling us to add greater value to our portfolio companies here in the US, Canada and in the future, elsewhere in the Americas.”

But even with a troubled economic future and looming penalties, Witte is not worried about the project. If need be, he says, he has until February 2011 to break ground before the Grand Avenue Authority can legally go elsewhere or renegotiate their deal with Related.

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