Monday, September 23, 2013

Another Construction Bubble? Evidence from Los Angeles

Driving around Los Angeles, I saw the following collection of retail storefronts along the south side of Firestone Blvd west of Atlantic Avenue.

This is in the city of South Gate, which borders Watts and Compton. It is a zip code (90280) that is much poorer, younger, and less educated than the California or U.S. averages.

Now, I know what you're thinking: this street obviously needs more retail square footage.

Fortunately, the good people at Primestor Development appear to be willing to help out. Their new 400,000 square foot project Azalea is directly across the street from the storefronts above.

Now maybe they are correct that there aren't enough fast casual restaurants within a five mile radius. But with a per capita income of $12,000 - $33/day for food, clothes, housing, transportation, utilities, cell phones (!), etc - is this where you want to place your bets?

As I was writing this, a paper called "The global cycle: A cycle of construction and not business investment" [pdf] happened to come across my desk. They point out that the economic recovery is concentrated in construction and not in capital goods, except those necessary for public infrastructure. Activity is concentrated in real estate because of low interest rates and probably because of the perception that making buildings is "low risk". However, the authors warn,
"An economic recovery due to investment in construction and not productive investment is atypical. It is probably due to the powerful effect of monetary policy on investment in construction. It is likely to be vulnerable [because] it is threatened by more restrictive monetary policy, it creates no additional production capacity, [and] it is not relayed by a pickup in international trade"
It looks as though the Fed has blown another construction bubble, because blowing bubbles is all they know, and the proof is in the sudden explosion of construction projects in very marginal locations.


Taylor Conant said...

When I was selling cars I saw "Huntington Park" on a "well qualified buyer's" application and asked someone where that was and they said it was the shittiest, most dangerous part of the ghetto in Los Angeles.

Also known as a "Prime Trade Area"

CP said...

What would be a more marginal site location, this one or a flood plain?

CP said...

Historically, many towns have been built on floodplains, where they are highly susceptible to flooding, for a number of reasons: access to fresh water; the fertility of floodplain land for farming; cheap transportation, via rivers and railroads, which often followed rivers; ease of development of flat land

CP said...

But hey, South Gate is safer than 19% of cities in the U.S.!

CP said...

South Gate also has the highest sales tax in California! 10.25%

CP said...

From 2001 to 2003, then-city treasurer, Albert Robles, along with three accomplices on the city council, accepted bribes and in turn gave taxpayer dollars to friends and relatives to perform city contracts. The three accomplices formed a majority of the five member city council, so they could effectively run the city any way they wanted. For example, in 2002, Robles was arrested on felony threat charges but was appointed by the city council to the deputy city manager position and had his legal bills covered by the city. The city council gave themselves a 2000% pay raise, and cut the pay of city clerk Carmen Avalos by 90%, after she complained about corruption and election fraud in the city to the California State Secretary.

South Gate's recent political history has been characterized by political observers and editors as having elements of Third World Politics.,_California

CP said...

Only half a mile away from the property is Cudahy, CA:

"Cudahy resembles a Mexican border town more than it does a Los Angeles suburb. Entrenched gangs and Mexican drug trafficking have trapped working-class legal and illegal immigrants in a cycle of violence and fear, in a city where less than a quarter of the 28,000 residents are eligible to vote."

"Victor liked it better where his family used to live: Compton, one of L.A.’s notorious trouble spots. 'There should be more police here in Cudahy. Kids don’t play outside. People don’t feel safe.'"

"A rough-and-tumble world of small-city politics has come to define the drug- and gang-infested cities clustered around the 710 freeway: Bell Gardens, Cudahy, Huntington Park, Lynwood, Maywood and South Gate, among others."

CP said...

The cities around the 710 freeway — a gateway from the Port of Long Beach to the rest of the nation — are so small they share freeway exits. Graffiti is scrawled on overpasses, exit signs and the concrete banks of the L.A. River, informing visitors that they are about to enter gangland. The grimy strip malls, auto-body shops and fast-food joints further speak to a loss of prosperity.

Cudahy, the smallest, poorest and most violent of these cities, feels like a place the law has forgotten — a feeling that intensifies along Santa Ana Street, where a large “18” is spray-painted on a telephone-utility box at one end of the block, and another large “18” is tagged at the other end — on a government dumpster, no less, at Cudahy City Hall.

CP said...

Cudahy City Hall is 1.0 mile by car from the Azalea property.

CP said...

Drug police say that many drug shipments crossing the Mexican border make two stops in San Diego and head straight for Cudahy. Drug runners from Cudahy return from Arizona and Texas and bring new guns into the community, police say. Meanwhile, 18th Street is engaged in violent conflict with a group called Just Blazing It, and the Clara Street and Cudahy 13 gangs remain active.