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Cushman President on Luck, Stocks and Borrowing

Executive is optimistic about downtown Los Angeles' fortunes, but worries about some REITs and bad bank debt in Japan and elsewhere.


One of the most outspoken executives in the Los Angeles commercial real estate world has long been John C. Cushman III, president and chief executive of Cushman Realty Corp., which he founded in 1978 with his brother Louis B. Cushman, the company's chairman. Cushman, whose brokerage firm has represented a host of Fortune 500 companies in some of the biggest deals in Los Angeles and other major U.S. cities, is known for his sharp assessments of the real estate industry and forecasts on where it is headed.

Cushman, who will be a featured speaker at The Times-sponsored Real Estate Outlook Conference on Thursday at the Century Plaza Hotel in Century City, is also known for devoting much of his time to pursuits outside his business, including duties as vice chairman of the Los Angeles Area Council of the Boy Scouts of America and a board member of Town Hall of Los Angeles, the L.A. World Affairs Council, Junior Achievement and the USC Board of Advisors. When he's not doing deals, Cushman likes to spend time at one of his favorite pieces of real estate, his ranch in Idaho.

Question: How does today's commercial real estate market compare with healthy markets of previous years?

Answer: This recovery is different. It's being driven by high-tech and telecommunications and diversified job growth in industries like the entertainment sector and international trade. There is also a flood of domestic capital chasing real estate. In the 1980s, we were not flush with capital in the United States. We didn't export capital. Americans today are investing in Thailand, Korea, China--all over the world. In the previous cycle, we went to Japan looking for their money. Now, the Japanese are quietly and discreetly selling assets.

Q: Is there anything that worries you about current market conditions?

A: I'm convinced we're going to see inflation because with the employment rate so low, there is so much demand for jobs in all sectors that employers are having trouble getting the people they need to run their businesses. Also, we are not out of the woods on what could go wrong in Asia. If the banks in Japan go into turmoil, it will destabilize the financial markets of the whole world, and if that happens, it will affect the global equity markets, which will cause pain and heartache in America--not just in real estate but in all of the capital and equity markets here and everywhere else in the world. It's not just Japan that we have to worry about, either. There is a lot of bad bank debt out there in other countries.

Q: Despite the Southern California real estate rebound, downtown Los Angeles is lagging other U.S. central business districts in recovering. What's your outlook on downtown's future?

A: Los Angeles has recovered slower than any other downtown in the country, but the real question is whether there's anything fundamentally wrong with downtown L.A. The answer is no. Downtown has been the victim of extraordinarily bad luck, and some of the vacancy numbers are misleading, but there is nothing wrong with its fundamentals. The outlook for downtown is very bright.

Q: What sort of bad luck and how are the numbers misleading?

A: It looks like a lot of corporations have left downtown, but they never really left, they were acquired in banking consolidations. Downtown has been the victim of bad luck in terms of the space that has been left vacant because of these consolidations.

The vacancy rate is misleading because it includes so many older buildings that were built before 1960, many of which are obsolete. They're all included in the 32 million square feet that's used to make the calculations on vacancy rates, but that's misleading because what really matters is the vacancy rate in Class A space, the very best buildings, which is about 16%. Even if you do look at all of the space, including the obsolete buildings, the vacancy rate has improved to about 23% today from 28.46% in 1992.

Q: What makes the older buildings obsolete?

A: Not all of them are obsolete, but many of them have the wrong floor sizes and shapes for today's tenants, the wrong depth between the windows and the core, and little or no parking. Many of them are in the wrong location. If the height between the floors isn't right, there isn't enough room to add the cabling that you need to make these buildings meet modern demands for power and technology.

Q: What's going to happen to these buildings?

A: That's a tricky question because some of them are architecturally protected as historical landmarks and some can in fact be adaptively reused for housing or other purposes. But many of them can't be saved and should in fact be imploded. A lot of them are just going to sit there.

Q: What makes you so optimistic about a downtown that has been so slow to recover?

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