California building costs drive developer to Florida: Bisnow

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The proposed $100 million Waldorf Astoria Collection hotel in Palm Beach (Sonnenblick Development image)

 Sonnenblick Development chairman Bob Sonnenblick says he has had enough with the high cost of doing business in Los Angeles, Orange County and California in general.

According to the published report in Bisnow, the developer has decided to move, directing $400 million in new investments to Florida.

The developer, which traces a 125-year history starting in New York, said he is putting all of his development and investment efforts into South Florida, directed from a new office in Miami’s Brickell neighbourhood.

“This is not by choice,” Busnow quoted Sonnenblick as saying. “It’s almost as if the (SoCal) marketplace is forcing me out. I love living here as a resident, but in terms of doing new business here, specifically real estate development, it’s almost impossible now, unfortunately.”

California has some of the nation’s highest construction costs. They rose 13.6 percent in Orange County/Los Angeles from 2011 to 2016, compared to 12 percent nationwide, the Terner Center for Housing Innovation at UC Berkley reports. Meanwhile, California  land prices in California have tripled in Los Angeles and the cost of materials is also going up about 4% to 5% per year.

However, Bisnow reports that Sonnenblick questioned the Berkeley study, saying from his experience construction costs have doubled in the past five years.

“I would give my arm if it only increased 3 percent a year,” Sonnenblick was quoted as saying. “In the world I live in, if you look at the past five years, we probably avera ged 8 percent to 10 percent per year compounded increases. Our biggest issues are materials and labor. Right now, labor costs are going up and the premiums that go with it.”

Sonnenblick said he decided to stop pursuing development deals in California about three to four years ago. Bisnow reports his company was in negotiations to build a hotel in downtown Los Angeles near the USC Medical Center.

“It was a nightmare,” he said. “Between the demands of the ridiculous land seller and the city approval process, we dropped the deal,” Sonnenblick said.  “I said, ‘Forget about this.’ I went down to Miami, we were greeted by the mayor with open arms and we found a similar site and now we’re zooming 100 miles per hour.”

Sonnenblick said in California today takes a developer eight to 10 years to start making good cash flow off a development project.

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Image from Somnnenblick Development’s webpage

“It’s insane, especially when I can go out to various metropolitan areas nationwide such as South Florida, Dallas, downtown Denver and in all of those places you can buy a piece of land and be under construction in one year,” he said. “Here to get through the entitlement process, NIMBYs and local community groups, it takes you in the best case three years.”

However. despite these observations, Sonneblick said he is keeping his existing portfolio of about one million sq. ft. of buildings in Los Angeles and Orange County.

His group is currently working on a $40 million, 70,000 sq. ft. mixed-use office and retail project on Jamboree Road in Irvine. This project is still waiting for other city approvals.

However, all of his other projects, including government buildings, office buildings, hotels and retail, are exclusively in Miami and Fort Lauderdale.

“I’m going to keep my headquarters here in Los Angeles,” he said. “I really do like living here. I’m probably going to split my time six months in each place. … I wish I had some opportunities to build here in LA. There is no such thing as a bargain acquisition of land or buildings. Everything is overpriced and we don’t buy assets that are overpriced.”

“The only thing that is going to keep developers here is if the price of land and price of construction comes down and that’s only going to happen if we go into a recession. I don’t think the governor or any of the state officials can control that.”

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