Slow-Growth Concerns : Downtown Optimism Clouded by Problems
Some local real estate experts are peering into their crystal balls to see what’s in store for Los Angeles’ downtown office market in the early 1990s--and not all of them like what they see.
Few doubt that the downtown market will still be one of the strongest in the nation in the early 1990s. They say demand for office space will be boosted by the city’s diverse economy, fast-growing financial services industry and the emergence of Los Angeles as the trade center of the Pacific Rim.
But there’s also concern that other factors--particularly the burgeoning slow-growth movement and problems caused by the city’s strained infrastructure, such as its overburdened roadways and sewer system--could seriously hamper future development and drive builders and the jobs their projects create to other parts of the state.
Most experts predict that the slow-growth movement will continue to gather steam in the years ahead. They say many Angelenos are fed up with what they feel has been too much growth, and local politicians are responding by taking a tougher stand against new development proposals.
Supporters of the slow-growth movement say it’s benefiting developers and other business interests as well as the general public.
“It’s not good for business if Santa Monica Bay is full of raw sewage because we can’t handle sewage from new construction,” City Councilman Zev Yaroslavsky said in a recent interview. “It’s not good for business if it takes an hour to get from downtown to Vermont Avenue.”
Developers, however, say the slow-growth movement will wind up hurting the city in the long run. They claim thousands of jobs will be lost as developers move on to cities that look more favorably on new projects.
In turn, Los Angeles would lose out on the millions of dollars in tax revenue that large commercial projects generate, making it even harder to improve the deteriorating infrastructure that ignited the slow-growth movement in the first place.
“Our infrastructure is already in bad shape, and it’s not fair to make the builders pay to fix problems that they didn’t create,” said Douglas R. Ring, an attorney who heads the real estate practice in the Los Angeles law office of Shea & Gould.
If city officials keep levying large fees on developers who want to build commercial complexes, Ring said, “sooner or later, we’re going to drive them out of town. We’ve enjoyed an incredible economic boom here, but we can break that boom, too.”
But while the slow-growth movement and other factors may slow downtown development, no one believes building will come to a screeching halt.
“The New York and foreign banks are going to keep expanding here, and that brings along all the groups that serve the industry--lawyers, accountants, consultants and everybody else connected to business,” said Paul J. Garity, a partner in the Los Angeles office of Peat Marwick Main & Co., an accounting and consulting firm. “Los Angeles’ status as headquarters of the Pacific Rim makes the Southland that much more attractive.”
According to a recent Peat Marwick study, a staggering 24 projects have been announced for downtown that would double the size of the office market to 50 million square feet by 1992. If all those projects are actually built, it would lead to an unprecedented glut of vacant office space that could bankrupt many builders.
Nervous About Glut
However, the blossoming slow-growth movement will prevent many of those projects from ever leaving the drawing board, Garity said.
Many others will be scuttled because developers and lenders would get nervous about a possible office glut if more than six or seven proposed high-rises broke ground by the end of this decade.
Garity and most commercial brokerage firms predict that only about 10 million square feet of space will be added to downtown’s existing office stock over the next five years.
They also say that most of the new space will be absorbed by new and expanding businesses, putting modest upward pressure on rents and furthering a recent trend that finds developers reducing the concessions they make to tenants.
David McKenney, senior vice president in the downtown office of Cushman & Wakefield of California Inc., a commercial brokerage, said several “hot” development areas will emerge downtown by the early part of the next decade.
One of Hottest Pockets
He predicted South Park, a redevelopment area bounded by the Harbor Freeway, Grand Avenue, 7th and 9th streets, will be one of downtown’s hottest pockets of office space. So will the so-called Central City West, on the west side of the Harbor Freeway between 2nd and 9th streets, where Transpacific Development Co. is already building a 33-story building.
The tallest building on the West Coast--Maguire Thomas Partners’ 73-story Library Tower--is expected to open in 1990 at 5th and Hope streets. A 58-story companion office complex nearby will open later that year.
Broadway and Spring streets will see a resurgence in new retail and rehabilitation projects, McKenney said, because several blocks on those two streets are now listed as official historic districts on the National Register of Historic Places and because retailers on Broadway “are experiencing very strong sales.
“I also think Little Tokyo will have more rehabilitation going on, especially the conversion of some old-line industrial buildings into higher-end industrial and retail space. New projects will push Little Tokyo farther west, past its current boundary of Los Angeles Street,” he said.
Foreign investors are expected to continue snapping up well-located commercial buildings in Los Angeles and other parts of the West, continuing a trend highlighted by Tokyo-based Shuwa Investments Corp.’s surprising $620-million purchase of downtown’s Arco Plaza last year.
Offers Better Returns
Investors from Australia, China, Taiwan and other countries are expected to join the race for prime Southland properties in coming years, in part because U. S. real estate offers them better returns than property in their homeland.
Foreign firms are also expected to take a bigger role in the development of Southland real estate. “By building projects instead of buying them, foreign companies will be able to pocket construction profits and raise their overall yield,” said Stan Ross, co-managing partner of Los Angeles-based Kenneth Leventhal & Co., real estate consultants.
But while a continued influx of foreign investors should buoy commercial property values and put additional upward pressure on rents, few analysts believe it will threaten the health of the Southland’s office market by driving prices out of sight or creating widespread overbuilding.
“The Japanese and all those other foreign investors see the same vacancy rates we Americans do, and they see the same new buildings going up that we see,” said Garity. “They’re not going to pay way too much for properties, or build so many office towers that vacancy rates soar and the office market goes into the tank.
“When it comes right down to it, foreigners are no dumber than Americans are, and we’ve all done pretty well over the past several years,” Garity said. “And the way I see it, we’ll all do well for the next several years.”
