Japanese Landlord Struggles With U.S. Culture Shock : Real Estate: Shuwa Investments, with huge U.S. holdings, has run into financial pressures and disillusioned employees, vendors and tenants.

Officials at Shuwa Investments Corp. were in an exuberant mood when the firm published its “Faces of Shuwa” commemorative book in 1987. “I love America,” the U.S. arm of Japan’s Shuwa Corp. proclaimed as it heralded its role in tapping the “vast potential of U.S. real estate investment.”

Just a year earlier, Shuwa had splashed onto the U.S. real estate scene with its first major commercial purchase--Los Angeles’ Arco Towers. It quickly sank nearly $3 billion in U.S. properties, gaining stature as the major Japanese investor here. Beloved by real estate brokers, the firm had also won friends elsewhere through philanthropy.

However, highflying Shuwa has since been forced down for a bumpy landing.

A souring real estate market in the United States, financial pressures in Japan, sharp cultural differences and a string of disillusioned U.S. employees, vendors and tenants have sorely tested Shuwa. The Japanese press has grouped Shuwa with three other real estate companies, Azabu, Itoman, Dai-Ichi--derisively dubbed the AIDS group, suffering from a deadly disease of financial overextension. Shuwa’s ills are far from fatal, but its experiences illuminate the myriad challenges faced by Japanese investors in the deteriorating U.S. real estate environment and how the largest of them has been forced to adapt to a reversal of fortunes, both real and perceived.

“My image of Shuwa was of a solid, well-run, successful Japanese real estate corporation,” said one Los Angeles attorney who backed out of a Shuwa lease this year after the firm allegedly failed to deliver on promised tenant services. “My image of them today is of a crumbling, overextended, poorly managed operation.”

For its part, Shuwa said it is paying more attention to management rather than acquiring property. The soft U.S. real estate market forced a change in focus, say Shuwa officials in Los Angeles. In the past year, the firm has taken direct management control of 2 million square feet of its property and now manages 60% of its portfolio, Clay Dunning, vice president of Los Angeles-based Shuwa Investments, said in an interview.

Although the process has been marked by what they call “a learning curve and growing pains,” officials say they were “satisfied” with the firm’s performance and ability to adapt.

The U.S. subsidiary is not losing money, Dunning said. And by several measures--a 90% occupancy rate, 75% tenant retention rate and an employee turnover of less than 10% in recent months--the firm has outperformed the average U.S. real estate investor.

Alan D. Levy, president of Tishman West Cos., said Shuwa has worked hard to adapt to changing market conditions and American landlord-tenant business relations.

“It was very much that they came over and took huge bites of the apple and weren’t comfortable trying to digest it themselves,” said Levy, whose firm manages the Arco Tower building in downtown Los Angeles and leases two buildings in Century City for Shuwa. “Like all of us, they’ve made their share of mistakes. But on balance, I think they want to do the right thing.”

For Shuwa, the challenges have been formidable.

Like other Japanese development companies, the firm cashed in on soaring property values in Japan during the 1980s to snap up U.S. real estate. As property values doubled in Tokyo, Japanese firms were able to use their inflated land holdings as collateral to take out loans for overseas acquisitions.

Former employees repeatedly describe Shuwa Investments President Takaji Kobayashi during the period as “a kid in a candy store” endowed with billions of dollars from Tokyo to buy prime property in Los Angeles, San Francisco, New York, Chicago and Boston.

But a doubling of interest rates, a plunge in the Tokyo stock market and a squeeze on bank lending during the past few years has put the firm’s parent company, Shuwa Corp., in financial distress. The privately held firm won’t disclose its balance sheets, but analysts in Japan estimate Shuwa’s reported debt at more than $730 billion and, until bailed out by loans from a Japanese supermarket giant, daily interest payments of more than $1 million.

To stay afloat, Shuwa last year began selling off pieces of its supermarket business--most recently, $109 million in stock of the Izumiya chain.

“They bought too much, too fast, near the peak of the market,” said Bernard Siman, an analyst with Jardine Fleming Securities in Tokyo. “If you look at them technically, their balance sheet doesn’t look very good. But they have a strong asset base, including in Los Angeles, and considerable leverage in the retail distribution system. I don’t think there is any question of them going bankrupt.”

In the United States, a softening real estate market has caused Shuwa Investments to virtually deactivate its acquisitions department. It also dismissed eight employees last December in its first layoff, including Americans holding high-level positions. The firm has also tried to sell at least five U.S. properties. Shuwa officials confirmed that the 655 S. Hope St. building in Los Angeles and a Riverside County golf course fell out of escrow but that two residential projects in Orange County were recently sold for an undisclosed amount in what they considered a minor transaction.

The Baldwin Industrial Park Office in Baldwin Park was sold last year, but Shuwa stressed that it represented just a tiny fraction of its total portfolio.

One source close to Shuwa said Kobayashi was reluctant to sell--or at least publicize it--because it would mean an admission of defeat and loss of face. Kobayashi and his father, Shigeru, chairman of Shuwa Corp., declined requests for interviews.

While it scales back, Shuwa continues to cultivate good community relations through philanthropic donations. But it’s still being battered by controversy over its business and employment practices in the United States.

Although most vendors would speak only on the condition of anonymity, they complain about persistently slow payments. Tenants gripe about delays in service. And former employees described an operation paralyzed by paperwork, disorganization and at times less-than-harmonious relations between the Japanese executives and American work force, particularly female managers.

“The biggest mistake they made, and continue to make, is that they just don’t want to bend to the American way of doing business,” said Brooke Gorenson, Shuwa’s assistant leasing manager until resigning in 1989.

One difficulty has been adjusting to the polar difference in business practices between Japan, where the landlord is king, and the United States, where tenants demand prompt service and such perquisites as months of free rent and generous building improvement allowances.

“Here you’ve got to give free rent and outrageous tenant improvements, and this is in the context of Japan, where they simply collect the rent and never give tenant improvements and the tenants never leave and the rent goes up every two years,” said Eugene Page, principal and international director of Knight Frank Faulkner Baillieu, a brokerage.

Added Gorenson: “Unfortunately, a lot of that mentality came here and it has taken them years to adjust to the mind-set that this is a service industry.”

Although some Japanese firms, such as Mitsui Fudosan, have moved quickly to renovate their buildings, Los Angeles real estate sources say Shuwa has acquired a reputation for being tightfisted and slow.

For instance, several Americans advised Shuwa to renovate its two Century City buildings after the purchase in 1986, including the replacement of decrepit elevators that tenants say sometimes take 10 minutes to arrive. But it took two years before the firm accepted Tishman West’s urging to renovate; work began in earnest late last year.

In addition, the buildings had an asbestos problem that was not disclosed to tenants until Los Angeles attorney Martin Rub accidentally found about it and sued.

In Orange County, Gorenson said she spearheaded plans to renovate the Downey Savings Building to boost an occupancy rate that plummeted to 25% after a major tenant moved. But after the plans had been drawn, the colors and finishes chosen, Kobayashi suddenly decided to put the whole project on hold--a controversial decision that Gorenson said caused her to resign.

“It’s a constant educational tug-of-war, because candidly some people in the company maybe aren’t convinced this is the right thing to do,” said Levy of Tishman West. “But I think they recognize they have to do what the market demands.”

Indeed, Shuwa has spent millions of dollars to renovate other buildings, such as the Arco Plaza in Los Angeles and the ABC Building in New York. The Downey plan was put on hold because of the softening market but will be implemented gradually in phases, said Dunning, Shuwa’s vice president.

“Talk is cheap. The reality is what you do, and Shuwa has put millions and millions into its properties,” he said.

Shuwa’s perceived tightfistedness also surfaced in an initial unwillingness to make aggressive deals and bring down rents as the U.S. real estate market began to soften. As a result, analysts say, they lost several clients, including Apple Computer in Orange County.

However, Levy said Shuwa has evolved and learned to make competitive offers. In a major triumph, the firm managed to renew the lease of Ernst & Young, a major Arco client, even after a local business journal announced that the firm had decided to move to a competing building. Other Century City tenants also say Shuwa has recently given them attractive terms, such as 18 months’ free rent, tenant improvement allowances as high as $45 a square foot and protection against Proposition 13 tax reassessments should the building be sold.

Another frequent complaint is that Shuwa has been perennially late in paying vendors and servicing tenants. Stories abound: The law firm that backed out of a lease when Shuwa failed to pay its renovation bill on time; the brokerage that contends it is owed more than $100,000 in leasing fees submitted more than six months ago.

The firm is involved in at least 75 civil court cases in Los Angeles, facing charges ranging from faulty building maintenance to welshing on tens of thousands of dollars in debts. In contrast, about 15 cases have been filed in the last decade involving Mitsui Fudosan and even fewer involving the other top Japanese real estate investors in the United States.

In many of the cases, Shuwa sued the tenants for breaking their lease, and the tenants responded by chronicling their dissatisfaction. One men’s clothing retailer in Arco Plaza, for instance, claimed in court papers that cockroaches and vermin infested the premises, including the clothes, “causing disgruntlement, embarrassment and loss of business.”

Gregg Holwick, a Van Nuys building contractor, said he refuses to do business with Shuwa because of the firm’s perennially late payments. He said Shuwa often took as long as four months to pay bills totaling more than $100,000 for work his firm did in the Century City buildings. Usually, Holwick said, payments are made in 30 to 45 days.

“They weren’t apologetic. Their attitude was, ‘This is when we’re going to pay; take it or leave it,’ ” Holwick said.

Other tenants and vendors are satisfied with Shuwa. Cathi Degan, a sales manager with Stuart-Dean Co. in Los Angeles, said initial payments were slow, but after the maintenance firm learned to work with Shuwa’s “paper flow,” the problems ended.

According to sources close to Shuwa, the payment problems reflected the firm’s worsening financial situation. At one point last year, one source said, “things nearly ground to a halt” and payments became slower.

But former employees say part of the problem is structural, caused by a massive paperwork system that sometimes require dozens of approval signatures. Although most firms give their building managers authority to purchase items within a certain limit, Shuwa at one point required the president to individually approve items as small as toilet paper.

Dunning, however, said a new computer system should speed up the process. But he and other Shuwa officials also said they did not perceive a major problem. “Our payment procedure is satisfactory,” the firm said in a written statment. “While delays and disputes do occasionally occur, all vendors receive fair treatment.”

Some employees perceived that the stringent approval system meant Shuwa did not trust its American work force. Even top managers were required to sign in and out in detail, stay at their desk until 6 p.m.--even if work was finished--and fill out stringent forms to take vacations.

Like several other Americans interviewed, Frank Neal joined Shuwa full of hope and high expectations--and left more than a bit disillusioned.

“I read in business school (that) Japanese managers had a lot to teach American managers--close teamwork, managers working closely with the working folks. But that isn’t what Shuwa did at all,” said Neal, a former building manager in Boston who was laid off in December.

The firm has been hit with at least four lawsuits from former employees alleging mistreatment--two Japanese and two Americans. But Shuwa denies the allegations.

In addition, some American female managers also said they perceived a subtle but clear bias against them. In 1988, for instance, 22 of 24 American men hired by Shuwa in the Los Angeles office were paid more than $30,000. But only five of 25 American women hired by Shuwa were paid as much, according to company records. Men tended to be hired into acquisitions, finance, architecture, legal and construction areas, earning an average of $58,000. Women, in contrast, tended to be hired into secretarial, leasing and building manager jobs, earning an average of $25,000.

Gorenson, the top American woman manager at the time, said she perceived some sexism in the disagreement over the renovation of the Downey building. “He (Kobayashi) had problems because I was a woman. That’s what upset him. Here was this woman disagreeing with him.”

But Gorenson, like other women managers interviewed, downplayed their suspicions about bias, saying they’ve learned to work in an industry that is in general dominated by men.

Shuwa officials say such problems have been wildly exaggerated. In a written statement, the company described its atmosphere as one of “trust and cooperation.” The firm also said most of its American employees, who account for 90% of the total, were “knowledgeable, hard-working, committed and effective.”

The firm also said qualified women were provided with the opportunity for employment and advancement.

Steve Clemons, president of the Japan America Society of Southern California, said Shuwa official Yoshio Yamashita in particular has worked hard to integrate the firm into American culture. The firm recently donated $25,000 to the society.

But the road has been tough, he said. “Shuwa was the company everyone wanted to love but it was damn hard because of all the things that happened,” Clemons said. “What’s around the corner? No one knows.”

Shuwa Investments Corp.’s holdings

Above is the Downey Savings Building, one of Shuwa Investments Corp.’s major properties in the Southland. Other holdings include:

Los Angeles County: Arco Towers 6222 Wilshire Blvd. 655 S. Hope St. 800 S. Figueroa St. 500 N. Brand Blvd. Orange County: Anaheim Office Park Rolm Building Mitsubishi Electric Building Taco Bell Building Downey Savings Building Source: Shuwa Investments Corp.

Shuwa Investments Corp. at a Glance Below are selected portfolio statistics, including primary investments in Class “A” office buildings in major business centers, including Los Angeles, San Francisco, Chicago, Boston, Philadelphia, New York, Washington and London. Size: 10 million rentable square feet* U.S. investments: $3 billion+ Vacancy rate: less than 10% Tenant retention: more than 75% Number of tenants: 700 Fee management: 40% Work force: Approximately 100 employed directly; about 600 employed indirectly through major building service vendors; more than 90% of workers employed directly are Americans. *Excludes one hotel, an apartment building and two golf courses. **Excludes golf course employees.