Beverly Hills' High Costs, Barriers To Entry Aren't Keeping (Luxury) Developers Away
In Beverly Hills, the slow pace of entitlements has limited the number of new projects across sectors of commercial real estate and made it so supply in many asset classes hasn't kept up with demand in the relatively small, wealthy city. Those who can get in, especially on residential projects, are reaping the benefits even in spite of rising construction costs.
“Low-density entitlements are the only thing that’s allowed, and it can take a decade to entitle certain projects,” StarPoint Properties CEO Paul Daneshrad told an audience of more than 100 attendees at Bisnow’s Future of Beverly Hills and West Los Angeles event Tuesday.
Daneshrad was speaking to the office market in Beverly Hills, especially in the Golden Triangle area of Beverly Hills, a nickname used to refer to the area bounded by Santa Monica Boulevard, Wilshire Boulevard and Canon Drive. StarPoint owns a 12-story office building in that area at 433 North Camden. But other panelists found similar conditions in other sectors.
Dan Gura, national director of business development at MVE + Partners, said housing is in great demand across LA, including in Beverly Hills and in West LA. Many of the projects his firm works on in those areas are predominantly residential as a response to that need.
“[Residential] rents are through the roof; there’s not a lot of supply in the for-sale market, so that’s why we’re seeing developers look to the high end,” Gura said.
The LA metro area averaged an overall asking rent of $2,402 as of December 2021, according to a Yardi Matrix year-end report — among the highest asking rents in the country, the report found.
The event was held across the street from the under-construction Mandarin Oriental Residences at 9200 Wilshire Blvd., a project held up as an example of developers catering to luxury residents as well as the high cost of entering the Beverly Hills market. MVE + Partners is designing the project.
Developer Shvo, in a joint venture with Bilgili Group and Deutsche Finance, bought the site at 9200 Wilshire Blvd. for $130M in 2019. The seller, Beverly Hills-based New Pacific Realty Corp., bought the site in 2010 for $16.5M.
The development team secured a $190M construction loan later in 2019 for the 54-unit project from ACORE Capital.
“It’s a big bet for Shvo,” Gura said. “It's $130M [for the land]. There are 54 branded luxury residences. You can do the math.”
Units in the roughly 300K SF project are expected to start at $3.6M, with penthouses expected to command $40M, the Real Deal reported.
In addition to the sky-high costs just to get into the market in Beverly Hills, panelists said that rising costs for materials, labor and other key elements of development were impacting their present and future, changing the ways they do business, at least in the short term.
Daneshrad said his company has stopped most of the value-add projects it had in the pipeline, anticipating that inflation will moderate over time and make them feasible again. In instances where projects have to start and can’t be put off, StarPoint has absorbed unexpected costs and been able to recoup them because rents for luxury rental housing is so high.
“Rental rates have sort of offset a lot of our increases in construction,” Daneshrad said. “Even if we've had a 30% increase in commodity prices on some line items, most of our rental rates on our products in the markets that we are developing, we've seen rental rates increase anywhere between 10% to 20%.”
Panelists also touched on the continued importance of including parking in high-end projects, amenities they are using to lure these top-of-the-market tenants to their properties and the $2B project planned by Alagem Capital and Cain International at Wilshire and Santa Monica boulevards. Daneshrad and Gura shared the stage with Align Residential President Roman Speron and Brownstein Hyatt Farber Schreck shareholder Jonathan Bloch, who moderated the discussion.