April 30, 1992 - From the April, 1992 issue

Concluding Analysis: Economic Changes Bring New Land Use Realities

With the recession dominating the planning and land-use arena during 1992, The Planning Report this month continues its coverage of economic change with an analysis by Jack Kyser, chief economist of the Economic Development Corporation.

Joel Kotkin offers a differing viewpoint on economic change in the second half of this article.


Joel Kotkin: These changes threaten old notions and established interests, who want to use public policy to slow down and even reverse the transformations sweeping our region.

The Los Angeles area’s economy is undergoing major changes, whose implications for planning, development, and the public sector are not well understood by either business and government leaders, or the general public. These changes include the following:

  • The down-sizing in defense-related aerospace, resulting in a loss of 62,000 jobs and $2.3 billion in personal income between 1987 and 1991 in Los Angeles County, offers a major challenge. This downtrend will continue, and there is vigorous debate on how to stimulate the aerospace industry’s conversion to commercial business.

Somewhat lost in the uproar are the bleak near-term employment prospects for displaced aerospace workers, which has implications for demands on social services. A land-use question flowing from this downsizing is how to recycle the excess manufacturing facilities, as there will probably be hazardous waste problems at most sites.

  • Business flight is a growing issue in both the state and the local area. In some quarters, discussion of the problems with the local business environment is viewed as being negative. However, the problems in workers’ compensation insurance and overregulation affect the bottom line of all types of business, and there is very strong evidence that a growing number of businesses are either shutting down or leaving the area.

Again, this has an impact on the demand for government services from displaced workers, and of course on the stream of tax revenues. The recycling of old, inefficient facilities crops up again, especially in zoning issues. Residents who may have co-existed with manufacturing in the past may oppose new industrial development.

  • The near depression in construction and real estate also has economic implications. Consensus forecasts indicate that it will be 1994 before there is any upturn in nonresidential construction in the area. When nonresidential construction does recover, there will be a more orderly development process with only modest speculative development. Local governments are losing permit fee income, and again there are unfavorable employment implications.

The one bright spot in the real estate sector is residential, and there has been a turnaround in the resale housing segment. The consensus is that new homebuilding will also rebound in 1992, especially in entry-level product. There are two dark clouds hovering over this forecast. One is the recent upturn in mortgage rates, and the other is the ominous climb in foreclosures that could dump distress-priced homes on the market.

  • The banking industry is in the midst of mergers, and middle management jobs will be lost, with reemployment prospects for the displaced workers being rather bleak. Again, from a land-use perspective, this economic change creates excess office space and will allow the reuse of branch bank locations.
  • The retail industry is in the midst of a major restructuring. A large number of retail outlets are being closed, from auto dealerships to department stores that anchor regional malls. This all has very negative financial implications for cities, especially if a major generator of sales tax revenue unexpectedly goes bust.

The near-term economic outlook for the Los Angeles area calls for continued job losses in 1992, and a slow economic rebound starting in 1993. This means that unemployment will remain high, and that government budgets will continue under extreme pressure. Many governments will be forced to look seriously at privatization of some services.

Where Are We Going?

These changes have sparked a vigorous debate about where the economy of Los Angeles is headed, not only over whether we will have enough jobs but also over whether we will have the right kind of jobs to absorb displaced workers from a wide variety of industries.

But despite this economic duress, there is still a no-growth, slow growth cabal. As readers of The Planning Report are aware, there are several local examples, including:

  • The proposed expansion of the Twentieth Century Fox Studios in Century City has run into strong opposition from community activists. The studio has indicated that if these expansion plans are turned down, they will move to another location. Jobs and spending will be lost to the West Side, and if the studio site is redeveloped, it will be as expensive housing that will generate a significant amount of traffic.
  • The debate over the allowable density at Warner Center has dragged on for several years. There are a number of aerospace/high-tech firms in the area, and several have indicated that their business prospects are favorable and might require expansion.
  • In Santa Clarita, a slow-growth measure (with a carrot of more low-cost housing) is up for a vote.

What Does It All Mean?

For governments, budgets will remain under pressure for several years. Raising fees and taxes will not be too viable an option. Moreover, city governments will have to keep an eagle eye on their business (i.e., tax) base to guard against poaching by surrounding cities.

For planners, there will be pressure to expedite developments that create jobs and increase the tax base. However, the NIMBY contingent will remain strong and vocal, and over the next few years planners could find themselves caught in a vicious crossfire between pro-growthers, NIMBYs, and ethnic community activists anxious for quality jobs. A new and powerful interest group could emerge in this debate: the displaced middle managers.

For developers, there will be some improvement in the business environment, but the overall rules in the development game in the area have changed. The days of boom and bust are probably over. A new area of opportunity is recycling failed projects, such as retail malls and industrial space. Cities will be more open to innovative re-use proposals that solve problems such as creation of jobs and tax base.

For architects and suppliers to the construction industry. times will continue to be lean for at least two more years. However, the real estate recycling business also offers significant opportunities for these firms.

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New Economic Realities

For the Los Angeles area as a whole, the adjustment to the new economic realities will be difficult, and will see continued friction not only between various ethnic groups, but between pro-growth and no-growth factions. Underneath it all is the fear that the Los Angeles economic pie is shrinking, while the quality of life has been degraded.

However, the Los Angeles area still has significant economic opportunities, and industries with bright growth prospects. These include apparel design and manufacturing, engineering services, entertainment, international trade, and tourism. And aerospace will not completely disappear. While other industries could be nurtured, this is a skill that needs to be learned by both business and government. The development of our mass transit network will have a powerful impact on business location decisions, and could tum distressed areas into hot locations.

While Los Angeles will continue to sprawl outward, the re-use of old facilities will become more important as cities seek to maintain jobs and tax base. Too often, we have “wasted” land in the urban core. Hard economic times could open the door to new ideas for innovative property re­use.

Jack Kyser is the chief economist for the Economic Development Corporation of Los Angeles County.

 

Joel Kotkin’s Counterpoint to Kyser Article

Jack Kyser’s remarks on the current economic prospects of Southern California reflect a better than usual distillation of our local establishment’s conventional wisdom. Although less relentlessly pessimistic than the “new Jack” we have seen since our best-liked local economist moved over to the Antonovich-Edelman machine office at the EDC, the analysis lacks a clear appreciation for the dynamic changes sweeping the region.

I see Southern California as in the midst of the most significant changes — in its economy structure, demography, and relation to the world — since the mid-1940s. These changes threaten old notions and established interests, who want to use public policy to slow down and even reverse the transformations sweeping our region.

It seems to me a better course would be to embrace these changes and make them work for the region. From this perspective, here is a different take on some of the critical issues facing the region:

  • With the Cold War over, the region faces unprecedented changes to a defense-dependent economic base. Many of our largest industrial employers will be forced to shrink dramatically. Attempts such as the EDC-sponsored Aerospace Task Force — one of the most widely ridiculed and obscenely cynical reports in years — represents an ongoing effort by these contractors to find a new public teat to suck on, largely in the form of transit contracts.

This approach, supported by a motley crew of defense contractors, their labor unions, left-wing public policy advocates, and politicians — would deprive the area of the opportunity to reinvigorate competitive, diversified, and generally smaller firms through transit and other public procurement.

  • Our society is shifting from a predominately Anglo society to a multi-racial, multi-cultural base. Although widely seen as a social disaster in the making, the new immigrants are generally highly motivated and work-and family-oriented; they represent an increasingly critical resource for our skilled and unskilled workforce, for new entrepreneurial talent, and for new business and political leadership. Opening the power structure represents a key, albeit unspoken issue, likely to be opposed by the insider groups who, after all, prefer business as usual.
  • Despite politically motivated attacks on foreign investors, our economy is becoming ever more entwined with that of other countries, particularly Mexico and the Pacific Rim. Politicians such as Zev Yaroslavsky or Pete Wilson who encourage foreigner-bashing may win votes in the short-term, but will rob the economy of an important source of new jobs and capital.

Joel Kotkin is a Fellow at Pepperdine University’s School of Business and at the Center for the New West.

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