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Commercial Real Estate | Q&A

Developer Is Bullish on Downtown Los Angeles

Outlook: With rents on the way up, Nelson Rising sees renewed activity ahead for the city center.

June 02, 1998|MELINDA FULMER | 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?

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