Tougher construction requirements in a number of major cities are boosting the price of real estate in those areas, while major building activity in the Sun Belt is on the wane.
A tenet of economics is that growth controls increase values of existing properties and reduce the value of undeveloped land.
A newly completed national survey among real estate investment managers and advisers indicates that cities with stiffened municipal regulations and attitudes governing development of commercial offices offer the highest return on existing properties, based on expected cash flow and capital appreciation.
Stan Ross, co-managing partner of Kenneth Leventhal & Co., national accounting specialists in real estate that ordered the study, said growth controls, "which discourage new office development, have contributed to increased investment value of existing office properties."
Ranked highest as the most attractive office markets for institutional investors by survey participants were Boston, New York, Chicago, Washington and San Francisco--none in the Sun Belt.
This reverses a strong earlier trend, dating back to the start of this decade, when most of the excitement in real estate was in sunnier climes. The pendulum has swung back to the more traditional urban centers, all in the northern half of the continent.
Los Angeles, because of its long-standing national role as a growth center, its aggressive policy on development, coupled with an overly abundant supply of space, finds itself outside the top five in the ranking.
Ross cited San Francisco as an example where recently enacted statutes limit the amount of future construction to less than 1-million square feet a year.
"Our respondents said they would be willing to pay a substantial premium for existing commercial properties in San Francisco because they believe few new buildings will be constructed because of stiff growth controls," Ross said.
Washington also imposes strict limits on office tower heights, and in Boston restrictions on the number and height of new structures have been proposed to the city's redevelopment authority.
"These five cities had vacancy rates less than the national average of 16.5% during the first quarter of this year," Ross noted. "Despite some softness in these office property markets and possible vacancy rate increases in the near future, these five cities will have steady, long-term growth in the work forces that occupy office buildings, especially in the service sector."
Although it may be attracting proportionately less investment than other cities, Manhattan ranks among the most attractive office property markets, he added.
Other top office markets found by the survey, supervised by David Dale-Johnson, associate professor in USC's Graduate School of Business Administration, were Minneapolis-St. Paul; Nashville, Tenn.; Jacksonville, Fla.; Albuquerque, N. M. and Sacramento.
These cities, Dale-Johnson explained, were in a second tier of areas, representing smaller markets. But, along with the larger top five cities, they should have stable, long-term growth in white collar jobs, the survey respondents predicted. (He said Los Angeles ranked eighth in the big-city category.)
While cities in the nation's energy belt, such as Denver and Houston, are suffering from an office space glut and depressed economics, they are attracting 'bargain hunters' looking for a good buy on distressed properties, which can be returned to health," Ross said.
What does all this portend for Los Angeles?
Politically, a stop-growth movement has already set the stage for a November ballot issue that would let the voters decide where and how much more commercial construction will be allowed in the city.
If successful, the initiative, sponsored by Councilmen Marvin Braude and Zev Yaroslavsky, would reduce by half the amount of future construction allowed on commercial property outside the major business centers such as downtown, Hollywood and the Wilshire Boulevard corridor.
The measure should determine whether the city's long-standing gung-ho building attitude will prevail or whether it will end its legendary historic sprawl.