Telecom Invasion Rattles Downtown L.A. Boosters

Just when it seemed as if you couldn’t give away office space in downtown Los Angeles, the telecommunications industry arrived on the scene, paying top dollar for vast amounts of floor space in formerly empty office buildings.

But not everyone is thrilled with the new neighbors, including Mayor Richard Riordan, who is alarmed by the most recent plan to fill the historic Terminal Annex postal facility with switching equipment.

The rapidly growing telecommunication tenants--ranging from traditional telephone companies to Internet-related start-ups--have converted about 1 million square feet of offices into high-tech industrial space. Instead of being filled with secretaries and accountants, the telecom space is jammed with computerized switching equipment that requires only a skeleton crew to monitor and maintain.

As a result, many in the downtown area are worried that the growing ranks of buildings that have “gone telecom” will undermine efforts to revive pedestrian life and attract retailers and restaurants. Some critics have called for putting historic buildings and ground-floor retail space off-limits to telecom tenants.

“I have a great concern that this will become a downtown filled with a series of these factories,” said Howard Sadowsky, vice chairman and regional manager at Julien J. Studley Inc., a real estate brokerage. “It’s gone too far.”

The issue has proved a thorny one for the downtown establishment and pro-business civic leaders. Recently, Riordan and the Central City Assn. opposed efforts by Level 3 Communications Inc. to lease or buy most of the sprawling Terminal Annex property in what would have been one of downtown’s biggest floor-space deals in years. Instead, Riordan and the association backed a campaign to attract the Art Center College of Design to the former postal facility on the edge of Chinatown.

“It would be great to fill the space with a lot of bodies,” said broker Hayden C. Eaves IV at Cushman & Wakefield, which represents Level 3 Communications. “But we have a large [tenant], and to block them is not helpful to downtown. They might put [their facility] in a different city.”

For now, however, telecom firms can’t seem to get enough space downtown. Since telecom industry deregulation prompted a spurt of expansion in 1996, more than 150 telecommunications and Internet firms have expanded or opened new facilities in the central city. The firms have leased about 5% of all downtown office space, according to an analysis by Studley.

This year, telecom firms are expected to lease about 500,000 square feet of downtown space, according Cushman & Wakefield. The pace is expected to continue next year.

“There are more and more of them popping up all the time,” said Eric Ham, a broker at Telecom Real Estate Services.

Los Angeles has become one of the leading telecommunications switching centers in the country. The companies are clustered downtown because nearly all of the major local, national and international fiber-optic trunk lines carrying voice and data run underneath downtown streets. The firms want to be close to one another so they can easily and cheaply hand off calls and other information between their networks. That’s why they are willing to rent space at rates that are often at least 20% more expensive than what a typical office user would pay.

“We try to locate as close as possible to fiber-optic routes,” said Linda Laughlin, spokeswoman for MCI WorldCom. “You don’t want to lose signal. It’s very important to keep things as close together as possible.”

MCI recently agreed to lease more than 200,000 square feet at 800 South Hope, an eight-story office building that once served as headquarters for the now-defunct Bullock’s department store chain. Along with two other smaller telecom firms, 800 South Hope will be nearly 90% occupied after having stood empty since 1996. MCI’s 10-year lease is valued at $31 million.

But the number of people who will work in the building will be far fewer than the more than 150 who were employed there when Bullock’s occupied the building. In general, telecom switching operations employ only about a quarter the number of people that a conventional tenant would in the same amount of space, brokers say.

“It’s not a lot of people,” said Robert D. Beguelin, a member of the group that purchased 800 South Hope earlier this year. “But if you don’t have it leased as industrial space, it would be vacant space, and that doesn’t do anybody any good.”

Most people would agree with Beguelin. But concern has grown as telecom firms expand beyond the mostly empty, generic downtown office blocks into historic structures and districts.

Ed Rosenthal, an investment broker at the real estate firm of Grubb & Ellis, is concerned that efforts to preserve old office buildings by converting them into residences or stores will be undermined by these expanding telecom firms.

“Those businesses aren’t bringing bodies on the street that would support retail development,” Rosenthal said.

The historic preservation group Los Angeles Conservancy is also growing worried as telecom firms expand along 7th Street--a once-fashionable shopping corridor--and rumors surface about a similar fate for historic Spring Street, where block after block of buildings stand nearly vacant.

“There are some situations where telecom could be a blessing and save an otherwise historic building,” said Kenneth Bernstein, director of preservation issues for the Los Angeles Conservancy. “[But] our preference is to support uses that bring vibrancy and excitement and people-oriented uses to historic spaces.”

The retail committee of the Central City Assn. is going to take up the matter of downtown telecom conversions and see if the group needs to take any action, said Carol Schatz, the group’s president.

“It raises a lot of issues for us as a downtown community,” she said.

The demand for more telecom space and the desire of civic leaders to create a more vibrant downtown came to a head recently at Terminal Annex, a historic landmark that once housed the city’s main post office.

Level 3, a Broomfield, Colo.-based telecom firm, was in exclusive negotiations with the U.S. Postal Service to lease or buy the 18-acre property. But the mayor’s office and the Central City Assn. backed a rival effort to relocate the prestigious Art Center College of Design from Pasadena to the facility.

Under pressure from the Riordan administration, the Postal Service apparently ended its exclusive talks with Level 3 despite financial offers that easily topped anything the art school could muster, according to people familiar with the deal.

“The mayor is very personally involved and doesn’t want this project to be lost,” said an official in Riordan’s office. “The art school has tremendous potential in downtown Los Angeles. The telecom companies are important, but it’s just not where the mayor wants one to go.”

Los Angeles developer Wayne Ratkovich, who is advising the Postal Service on possible new uses for Terminal Annex, would not comment on the matter, except to say that “nothing is close to a conclusion at this point. There is no commitment to Level 3 or the Art Center College of Design.”

Level 3 spokesman Steven Inglish said that Terminal Annex is one of several locations under consideration. The firm remains committed to finding space in downtown, he said.

Despite Level 3’s interest in downtown, many brokers say that telecom firms may start looking elsewhere if they keep bumping into opposition.

In addition, downtown could also risk losing out on attracting other telecom operations that are staffed with highly paid marketing and technical employees.

“These are companies that can pay top dollar for space,” said one broker. “They [civic leaders] should welcome any type of commerce downtown.”