Sule Aygoren Carranza is managing editor of Real Estate Forum and editor of Multi Housing forum, from which this article is excerpted.

Los Angeles—Changing demographics and development trends are reshaping the nation's downtowns, including Los Angeles and other California cities. More people are opting to live in urban centers rather than suburbs. Developers are following suit, building more communities in CBDs.

The trend is being fueled by several factors, says Delores A. Conway, director of the Casden Real Estate Economics Forecast at the Lusk Center for Real Estate at the University of Southern California here. In places like Los Angeles and Oakland, CA, developers are transforming vacant industrial buildings to residential lofts and marketing them for both rent and sale.

"The key point is that the space was available," Conway tells Multi-Housing Forum. "Adaptive reuse regulations were also put into effect, which is what spurred a lot of development in Downtown Los Angeles. That explains the supply side. Developers saw opportunities to do infill development of condominiums and rental apartments because the space was available, whereas land is incredibly scarce right now in Los Angeles, particularly for the largest developments. And then of course, the propensity is to build vertically, with higher densities, so multifamily is a natural fit."

This trend is evident in major cities like San Francisco, New York City, Philadelphia and Atlanta. "A lot of young people are looking at living downtown and that's part of a general trend," Conway relates. "When we lost so much of our manufacturing industry, a lot of facilities became vacant. It made sense to convert them to residential uses. The demand has also followed, partly because we're seeing the demographics changing."

On the demand side, those who purchase or rent these units can be broken into two groups. The first are young professionals, who want to live and work in the same area and who more often than not end up sharing a unit, especially when renting. "This coincides with the general demographic trend of people getting married later in life," Conway says. "There's this young group of people who are remaining downtown because they're not starting families and don't need better schools that are present in the suburbs. The 2000 Census, for instance, found that about 25% of all households are comprised of single people--that's a huge number."

The other group, she notes, are retiring baby boomers who downsize their homes and move into apartments to take advantage of the cultural and social amenities available in downtown areas.There are other, smaller population groups, too, including foreign buyers who relocate or buy second homes in the US. "People are moving downtown for a life experience. That makes multifamily attractive," Conway says. "Based on demographics, we expect that to continue."

Part of this trend has been the rise of transit-oriented development, especially given the traffic congestion and infrastructure issues that plague many major areas. Among the cities that have been encouraging this type of development are: Hollywood (with projects like Wilshire and Western on the Red Line); Pasadena, where developments are rising on the Gold Line; and Irvine, CA in Orange County, where the Platinum Triangle business area is centered around a transit stop.

While low interest rates and high construction costs made condominium development and homeownership more attractive, the tide seems to be turning. "Rents have gone up and condos have cooled tremendously, especially in Downtown San Diego," Conway reports. "You're actually seeing some reversions now, which means they're turning condos back into for-rent apartments. The vacancy rates in almost every big city in California are very low, many below 3%, which is amazing. On top of that, rents are rising significantly. Rents jumped 10% last year in San Francisco, 7% in Los Angeles and about 7% to 8% in Orange County. We're starting to see a convergence now between renting and owning, where both choices are becoming available to people who can afford them. The challenge, however, is to bring in more affordable housing. That's always a challenge."

While people once followed jobs, it appears that in many cases, jobs are now coming to where the people are. According to Conway, improving fundamentals and demand on in the multifamily market have come in tandem with improving economic conditions in many downtowns. "For example, the office vacancy rate in Downtown Los Angeles has really declined down from where it was two years ago and job growth has picked up," she says. "Companies are definitely moving back into the downtown areas because they see that they can have a labor force very close by."

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Demographic Trends Reshaping Downtowns

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