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HIGH AND DRY : Downtown Struggles to Recover From 1980s Building Boom That Went Bust

October 15, 1995|JESUS SANCHEZ | TIMES STAFF WRITER

In a darkened sales office 28 floors above Downtown Los Angeles, the corner walls slide away at the touch of a button and sunlight pours in through huge windows. Below, the site of Los Angeles Center comes into view.

But instead of the shimmering skyscrapers envisioned a few years ago, Los Angeles Center remains a collection of parking lots surrounding an outdated office building. The outlook for office development is so bleak that the project's backers now want to build a much less lucrative sports and entertainment complex instead.

"We were lucky we didn't build that first building," said Los Angeles Center's director of marketing, John Semcken, whose offices overlook the project site. "It would be sitting there empty."

While Southern California's commercial real estate market shows signs of renewed vigor, the region's most prominent business district, Downtown Los Angeles, remains stuck in a deep slump, forcing landlords to slash rents and developers to abandon their grand plans in favor of more modest, less traditional development.

After a dramatic building boom in the late 1980s and early 1990s, Downtown property values have plunged by nearly two-thirds, and almost a quarter of all office space lies vacant. Some buildings in the heart of the financial district are completely empty and huge new skyscrapers have been thrown into foreclosure.

Despite the widely held belief that Downtown has bottomed out and bargain rents will attract new tenants, the recovery will be painfully slow and uneven, say brokers and property owners. Looking beyond the current glut, real estate observers say Downtown Los Angeles and its peers nationwide will be plagued by numerous problems, ranging from the growth of rival suburban business centers to telecommuting and corporate downsizing.

"All things seem to be going the wrong way for Downtown Los Angeles," said real estate analyst Jonathan Litt at Salomon Bros.

The plunge in Downtown's fortunes has also punctured a great many civic and corporate egos inflated during the booming 1980s, when foreign investors from Tokyo to Toronto poured billions of dollars into Los Angeles real estate. Now, in a humbling turn of events, office buildings in once-sleepy Glendale command rents almost twice that of most Downtown skyscrapers.

"It was supposed to become the capital of the Pacific Rim. It didn't," said W. Brett White, regional manager for CB Commercial, a real estate brokerage.

Much of the financial pain and turmoil Downtown is hidden by an impressive display of marbled and mirrored skyscrapers that pushed the skyline to new and colorful heights. Developers built almost enough new space--about 8 million square feet between 1988 and 1992--to fill Century City. Figueroa Street alone added six high-rises.

The problem was that this new space--the result of a severe bout of overbuilding that swept the nation--would have taken nearly a decade to fill under normal circumstances. And things turned out to be far from normal in the early 1990s as recession and corporate restructuring decimated Downtown's traditional tenants--the banks, the law and accounting firms and the major corporations that paid top dollar for space.

Longtime Downtown denizens, such as Bank of America and Security Pacific, merged and slashed their staffs and office space. Other blue-chip tenants, including IBM and AT&T, have dumped large amounts of space on the market in the wake of painful reorganizations.

In a survey of a dozen major urban centers last year, Downtown Los Angeles had the dubious distinction of being the only market where landlords of prime office space lost money on their rents, according to Julien J. Studley Inc., a commercial real estate firm. For leases signed last year, the average rent--after landlord concessions--was less than $12 per square foot, about 40% of what it was in 1990.

Although many other downtown and suburban office markets have bounced back, Downtown Los Angeles has lagged because of the extent of the overbuilding and the depth and length of the regional recession.

"This is one of the worst markets in the country," said Stephen Bay, manager of Studley's Downtown office.

In a sign of future problems for landlords, accounting and consulting firm KPMG Peat Marwick this month began eliminating the permanent offices of about 100 consultants in its Downtown office. Instead, the managers will have to reserve an office when needed. Otherwise, they will work from client offices and home via telephone, computer and fax machine.

As a result, the firm has reduced its office by 1 1/2 floors, and "we are confident that we can accommodate [future] growth without adding space like we would have in the past," said KPMG's area operations director Bob Goldstein.

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