Tuesday, September 24, 2013

Comment on South Gate Field Trip / Los Angeles Construction Bubble

A correspondent writes in about the Los Angeles real estate field trip and observations about the new construction project in blighted South Gate, CA,

Two points
(1) There is a whole world of subsidized housing, transferable tax credits and tax-free muni financing. The developers will often have a captive (they don't like the term of course) non-profit that runs the properties they buy (sometimes they buy the defaulted loans). Local housing authorities don't like "for profit" entities running the housing sometimes so they have their non-profit run things (very well) and the fund gets the tax-free loan (secured by the property and at very, very attractive rates). So suboptimal location/properties might be very profitable to build. Then you probably have the retailers incentivezed to move there by some politically correct economic development authority. They also get special credits for hiring in certain areas.

(2) Where I was exposed to "good retail" in places where it does not belong was when I was taking the bus from Columbia across 125th street in Harlem over the Triboro to Queens. You probably would not walk on the sidewalk on 125th but there were big national chains all along the strip. Now there's even more coming.
Our financial system (which is not capitalist or free market) seems to be making horrific misallocations of resources.

The city of Cudahy is a mile away from the new 400,000 square foot property in South Gate. There's an LA Weekly article called The Town the Law Forgot,
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.
And I'm crazy for thinking you wouldn't want to build a new shopping center here?

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