Developer Is Bullish on Downtown Los Angeles

SPECIAL TO THE TIMES

Few developers are better poised to take advantage of the state's booming economy than San Francisco-based Catellus Development Corp. The public company, created from the real estate holdings of the Santa Fe Pacific railroad, is one of the largest landowners in the Western United States. Its portfolio, most of which is in California, contains more than 20,000 residential lots and commercial land that will eventually accommodate about 50 million square feet of buildings.

Its most valuable asset is 300 acres in Mission Bay adjacent to San Francisco Bay. The corporation also owns a number of large-scale projects, including industrial parks, residential land and substantial property around historic Union Station in Los Angeles and the Santa Fe Depot in San Diego.

This diverse range of developments has given Chief Executive Nelson Rising, formerly a partner at high-rise builder Maguire Thomas of Los Angeles, a unique perspective on the state's real estate market. Last week he shared insights on the business of real estate development and an update on the company's Southern California projects. He will also appear as a keynote speaker at the Los Angeles Times-sponsored Real Estate Outlook conference July 16 at the Century Plaza Hotel in Century City.

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Q: Where do you think Southern California is in the real estate cycle?

A: If you look at the four quadrants of the clock, I'd say from the standpoint of residential, we are now about a 6. Industrial is about a 6 and office is about 1 to 2, except in the Burbank media district, Santa Monica and Century City.

The real question in real estate today is whether that overbuilding phase is over. There are many people today who believe there is more discipline in real estate than there was before, because of [oversight by] capital markets.

Q: That's debatable, isn't it, considering the amount of capital chasing deals in the market now?

A: I think there is more discipline and more knowledge this time around. We have moved to the point where many of the major players in real estate are public, so much of the information about their projects is public. That's different than the past. So if you have a more informed investment community, even if they are not more disciplined, they may be more rational.

Q: So are you saying it's less risky to invest in real estate than it was before?

A: Listen, developers by nature are going to build if there are funds available. But look around San Francisco. Rents have doubled in the last two years, and there is only one new office building under construction right now. Now, does that mean there won't be three or four more? I didn't say that. But with rents going the way they're going, if you were having these characteristics in a prior day, you'd see more buildings going up.

Q: When do you think you can build office buildings here in Southern California, particularly on the 43 acres around Union Station?

A: Rents in the suburbs are going up rather rapidly. You are seeing some development in the Glendale media corridor, some in Santa Monica and some talk of building on the Westside. We are going through this period where supply is being burnt off and rents are going up. As that happens, downtown becomes more attractive because of its [lower] rents. Price will bring the next wave of tenants downtown. I would say by the end of 1999, you'll see it getting tighter. By 2000, you'll see rents get up to the point where it will almost justify building.

Q: Why would companies move near the train station, rather than lease space in the financial district?

A: If you look at the situation today, I would be surprised if you saw more than four contiguous blocks of space of over 100,000 square feet in downtown.

This is the transit hub of the region. I think if you are an employer and you think about your company in a total fashion, rent is only one part of the cost of your business. Retaining employees, attracting employees and motivating employees to increase productivity is all part of that. Home prices here have gone up 8.5% in the last two years, 16.5% in Orange County. If you don't locate your office near a transportation hub, you are going to have a tough time. You don't want people driving two hours a day to come to work and taking two hours to go home, because that hampers productivity.

Q: Just a few years ago, people were saying downtown wouldn't need another new office building for another 30 years, with close to the 10 million square feet built during the last development cycle.

A: They said the same thing in San Francisco and the rents we were signing two years ago in San Francisco have now tripled.

Q: You bid to renovate Olvera Street and are negotiating for the U.S. post office's Terminal Annex building next door. What are you planning for the area?

A: We are very interested in making sure that what happens around us links us to the Civic Center, which in turn links us to the financial core. Our interest in El Pueblo is to make sure there is a comfortable transition for a transit rider who comes through Union Station to walk to the Civic Center or Bunker Hill where there are other cultural activities.

Q: How would you link these areas?

A: By design. We are trying to focus on the front of Union Station, have it be more friendly to the pedestrian and more accessible to El Pueblo. Then when you walk to El Pueblo, it's important that the El Pueblo have something you want to walk to. Then when you walk through, you want to feel comfortable walking over to the Civic Center.

Q: Part of the plan for Union Station calls for some kind of retail or entertainment center. Will that provide the link?

A: It's possible. We are going through a very serious thought process right now. We have a flexible entitlement at Union Station that will allow us to move where the markets are. If retail seems to work, we can reduce the office portion and do more retail.

Q: Have you drawn up tentative plans? Have you talked to retail tenants?

A: We're not there yet. We are close. We're going through the rethinking of the designs. Maybe we'll be done by fall of this year.

Q: What's being kicked around?

A: It's premature. A variety of compatible uses have been kicked around, from entertainment-driven to more shopping-driven uses. We wouldn't do more than 350,000 square feet. But our biggest focus is not on retail. The retail is just to attract more tenants to our [proposed] 6.5 million square feet of office buildings.

Q: What's next for the station?

A: We just redid the courtyard, and the next thing will be the south half of the front. We are looking at how to make the access better to El Pueblo, a new signage program, a new lighting program.

Q: Much of your future is staked to the success or failure of the public transportation system.

A: I would suggest one word: "most." From a standpoint of corporate strategy, that's not something we are going to build our future on. There are too many uncertainties about that. We have now exported those skills to property we didn't already own. Last year we ended up acquiring land with 5.8 million square feet of new entitlements for industrial and commercial and approximately 10,000 residential units, and we are going to do a lot more this year.

Q: Where did you buy?

A: We bought 300 acres at the old Stapleton Airport in Denver. We bought that in September and had a groundbreaking last week. We also like the Pacific Northwest, Colorado, parts of Texas and the mid-Atlantic states. We are going to keep investing in these other areas. We have some very interesting opportunities.

Q: At one point, you worked on the feasibility of a new football stadium at Dodger Stadium. Are you now working with Rupert Murdoch, the new owner?

A: We are now doing a feasibility analysis of various items, not football, but studying Dodger Stadium itself. The role that we have now is simply in the corporate services area. It has nothing to do with what we initially studied.

Q: So what are you studying, how to revamp the stadium?

A: That basic question assumes that there has been a decision to revamp it. We are just looking at what issues are there. It's just a logical extension of the work that we did.

Q: Will your company expand further in Southern California, acquire more property?

A: Yes. I'm very bullish on Southern California. We are inclined to look at residential properties and suburban commercial properties right now. It's going to be very tough to find good housing sites today. So I'm looking at housing downtown. I don't know if the market is there yet, but it's a good time to look. We also think the market in downtown San Diego will come back a little faster than L.A., so we will be looking pretty aggressively for office there. But right now we have a lot of land in Southern California, so our acquisitions are primarily going to be focused in other areas.

Q: What is the status of your negotiations to purchase Terminal Annex?

A: We are in discussions and a lot of that will evolve as we refine our plans here at Union Station.

Q: That would give you access to 10 million square feet of commercial entitlements?

A: Yeah, plus or minus. We would get about 3 million square feet from that so, almost 10 million square feet. I've known [seller] Wayne Ratkovich since we were at UCLA together. We have an ongoing dialogue and we have worked very closely together in planning this.

Q: How will the high rate of population growth in Southern California factor into the planning of your developments?

A: Population growth is an extraordinarily important part of the planning for a developer like ourselves. It's going to mean higher-density projects. Urban sprawl has always been a problem and will continue to be a problem. Imagine if we had housing downtown, with all the office and other cultural amenities. It would be a fabulous addition.

You will see people rationally deciding to move to transportation corridors, because it's a smart way to get around. So I think areas that are linked by transit, whether it's balloon tire or rail, will do well. In this area, I think that the Valencia area will be quite attractive. I think you will also see areas of the Inland Empire continue to be attractive alternatives.

Developers will also begin looking at heretofore undeveloped areas that have proximity to key sub-markets. For example, areas that are close to the San Fernando Valley will grow and prosper as that area becomes a business center.

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