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Defense Is Reclaiming Its Space

Southland: Federal spending is expected to rise 10% this year, fueling demand for jobs and office space, report says.


More office space is going to aerospace.

Federal spending in Southern California, bolstered by a surge in defense contracts, is expected to rise by nearly 10% this year, fueling demand for jobs and office space at levels not seen since the early 1980s.

According to a report to be unveiled today, the Southland's defense industry is growing again, reversing a two-decade slide and representing one of the few bright spots in the region's economy.

In the first comprehensive look at the economic impact of the nation's war on terrorism, the study by real estate research firm Delta Associates confirms what so far has been largely anecdotal evidence of a defense buildup in the region. In the last year, local defense operations have won a bevy of major contracts, reinforcing the area's leading position in defense research and development.

"It's a regrettable thing to say, but Los Angeles benefits from a war," said Gregory H. Leisch, chief executive of Delta Associates, based in Alexandria, Va.

The study estimates that the ramp-up in defense spending will generate 5,000 local private-sector jobs annually for the next five years. The report did not consider secondary support jobs that could be created, which could add 5,000 to 7,500 to the region's payroll, economists say.

As a result of the employment gains, demand for office space is expected to increase, bolstering prospects for the sluggish commercial office market, particularly in the South Bay where defense cuts in the 1990s left many buildings with high vacancy rates.

The South Bay recovered during the dot-com boom of the late '90s, only to see that industry wither too.

The defense demand for Los Angeles-area office space could reach as much as 1.25 million square feet a year for the next five years, with about half of that in the South Bay, according to the study. Though the demand probably won't make a huge dent in the vacancy rate--there are about 34 million square feet of available office space in the Los Angeles area--it still is considered significant.

"Considering how soft the market has been, anything helps," Leisch said.

The boost for real estate will be diluted in part because defense contractors, like many other corporations, have so much excess space that they can accommodate large numbers of new employees without leasing new space, brokers say. In fact, half of the projected increase in demand will be absorbed by underutilized facilities, according to Delta Associates.

"There is substantial capacity ... within most of these companies to handle the growth," said real estate broker Jerry Porter at Cresa Partners.

The report estimates that defense spending this year in the region would increase by 9% to about $14 billion. The spending level is then expected to grow by an average of about 7% a year over the next five years, rising to $16.7 billion by 2006. The report did not consider the potential impact of a war with Iraq.

The study, commissioned by commercial real estate firm Transwestern Commercial Services, uncovered a trove of data about the defense industry in Southern California. Researchers analyzed federal contract awards for firms in Los Angeles and Orange counties, using the Freedom of Information Act to gain access to figures not readily available to the public. Among the findings:

* Last year, the federal government awarded $12.8 billion in contracts for defense work in Los Angeles and Orange counties, accounting for 92,000 full-time jobs.

* Last year's total was down 30% from a peak of $18.5 billion in 1983.

* More than three-quarters of the contracts were defense-related, while spending by the National Aeronautics and Space Administration accounted for about 20%.

* With operations in Seal Beach, Anaheim, Long Beach and Huntington Beach, Boeing Co. was the largest federal contractor, accounting for about $5 billion in awards last year. Caltech in Pasadena was second, with $1.5 billion in awards. Next was TRW in Redondo Beach, with $622 million.

Rep. Jane Harman (D-Venice), said she welcomed the findings, but worried about repeating the boom-bust cycles that have marked past defense buildups. "We've seen this movie before," she said, "so I'm cautiously optimistic."

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