Wells Fargo's hostile attempt to take over First Interstate Bank is bad news for Downtown Los Angeles. First Interstate leases more than 1.4 million square feet of office space, including the most visible in town--the top two floors of the First Interstate World Tower, the tallest building on the West Coast. Real estate analysts say the merger could cut that figure in half. The result? Downtown's office-vacancy rate--already well above 20%--would rise by 2%. Arco would be the last major corporation headquartered Downtown.
In broader terms, the proposed First Interstate takeover underscores the emerging crisis in America's downtowns. Since the flight of big retailers to suburban shopping malls, downtowns have prospered by catering to large corporations and professional law and accounting firms, which occupy most of the office space. The multistory bank tower, like First Interstate's, is the defining profile in the skylines of virtually every U.S. city. By housing large numbers of white-collar workers, these buildings kept downtowns alive, supporting small retail businesses and other institutions that would otherwise have withered away.
Up until the 1980s, getting these "trophy buildings" built was a major task of urban-renewal agencies. Millions of dollars were spent to clear land and subsidize developers when downtown markets appeared weak. In the late '80s, these efforts paid off. Major investors--American, European, Japanese--poured their money into such markets, especially Los Angeles. Redevelopment subsidies were no longer required--indeed, redevelopment agencies began to reap the financial benefits. Real estate super-broker John Cushman's favorite prop was a map of Downtown with little flags indicating which nationality owned which building.
Things are changing. Corporate downsizing is shrinking the Downtown work force in Los Angeles, as everywhere else. Not only are banks and other familiar Downtown institutions merging or disappearing, so are the big law and accounting firms. The gleaming office towers are beginning to show vacancies. Harder hit are the smaller, older buildings, whose tenants take advantage of the "buyer's market" to obtain good lease deals in newer buildings. In Los Angeles, the older buildings have a vacancy rate of 30% or higher. A dozen or more new trophy buildings, envisioned by '80s developers, will never be built.
America's downtowns--and Los Angeles' in particular--must therefore redefine themselves. To be successful, they must focus not on mega-projects but on lots of niche-market opportunities.
Without the skyscraper as a powerful symbol of success, a prosperous downtown will require a delicate balance. Its economic foundation will probably be government--local, state and federal. Despite their own downsizing, government agencies still represent the biggest, most stable and most committed employers Downtown. Virtually all major units of government have made major long-term commitments to the area recently, including the Metropolitan Water District, the Metropolitan Transportation Agency and the state of California.
Furthermore, government agencies are taking advantage of the office glut Downtown to move into "class A" space at cheap prices. The Los Angeles Unified School District, for example, recently sub-leased space in the IBM Tower on Bunker Hill; city government has moved substantial operations to a private office building on Figueroa Street.
Beyond government, however, Downtown will succeed only if all the major players--including the traditionally conservative corporate sector--agree on a vision of an urban center with subtle charms and a broad socioeconomic reach. Downtown leaders recently attempted to craft such a vision in the Downtown Strategic Plan. But perhaps the biggest challenge they face is how to pay for any vision. In the '70s and '80s, the revived Downtown was financed from two sources--both of which won't work anymore.
One was the developers of mega-skyscrapers, who renovated the Central Library, built the Museum of Contemporary Art and many other Downtown amenities in exchange for permission to construct their buildings. But when there is no demand for skyscrapers, there will be no developers lining up to pay for museums.
The other method was the system of "tax-increment financing," in which property taxes in the Downtown area were taken away from the county, the school district and other governmental units and reinvested Downtown. But this method is under constant attack in Sacramento. And former City Councilman Ernani Bernardi is currently preventing the Los Angeles Community Redevelopment Agency from spending money Downtown by demanding, in court, that the agency stick to the terms of a 1977 legal settlement regarding redevelopment funds. Bernardi may eventually lose. But, for now, the CRA is out of money for most Downtown investment. In any case, the tide is turning against this method.
So the Downtown of the future will have to accomplish a more subtle and delicate task without the benefits of big government subsidies that have traditionally accompanied urban-renewal efforts. This means that downtown-builders will have to stick more closely to industries that have a chance to flourish in the private market. It means they'll have to take the public funds they do have--government office rents, for example--and invest them wisely.
Downtown's future success is not a foregone conclusion. But damaging as the current trends appear, they may provide an opportunity. The long history of glitzy urban renewal has cost a lot of money and made a lot of enemies. A smaller-scale, more targeted approach might help keep Downtown on track by using a light touch rather than a heavy hand.*