DEVELOPERS—Optimism Reigns as Chastened Builders Move Ahead

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Developers around Los Angeles said they’re not going to let a little ol’ thing like the economy get in the way of their work.

An ever-optimistic bunch, they said big retail, office and industrial projects will likely not be delayed while consumers and the Federal Reserve figure out where the next turn in the economy will take them. As a group, local developers said they are on schedule with their various projects and will meet a ready market when those projects open.

While some of the optimism is pure hype, there are sectors where the enthusiasm may be warranted.

“Trammell Crow Co. has not abandoned or altered any of its development in light of the economic bump in the road,” said Henry Johnson, senior vice president and principal at Trammell Crow, which has 2 million square feet of industrial space soon coming on line at Irwindale Business Campus.

The ongoing expansions at the ports in Long Beach and San Pedro ensure an almost insatiable demand for industrial space in the region.

Some developers are acting as if the office market, which has shown signs of cooling and could turn volatile as economic conditions shake out, is going to keep chugging along despite the economic storm clouds on the horizon.

Count Crown Realty & Development President Robert Flaxman among those who refuse to accept that the economy is headed for any significant slowdown. Crown Realty is finishing up the 200,000-square-foot second phase of its Wateridge office development in Culver City.

Flaxman conceded that not a single tenant has signed a lease at the new phase, slated to open at the end of October, but interest is high and he’s got no qualms about adding space adjacent to a Westside market that is rife with sublease space.

“If anything, we’re seeing the pace (of interest) increase as the project moves along,” he said. “Would we have been getting more calls a year ago? I guess. Will we be getting less phone calls in six months? I don’t know. I hope not.”

Retail developer Rick Caruso, president of Caruso Affiliated Holdings, said the economy has nothing to do with his development approach.

“A project needs to make sense in good times or slow times,” Caruso said. “I think what does happen, though, is you’re always a little bit more conservative, double-checking the numbers, taking things out of the budget.”

Budget is one of the factors that Flaxman said works in his favor. Wateridge is a less-expensive project to build, which will allow him to offer tenants less-than-market rental rates.

“Just like the last cycle didn’t last forever, neither will this cycle,” he said. “When you build a building, it lasts for 30, 40, 50 years, not two or three quarters.”

Cost is one advantage in a soft market. Location is an advantage in any market.

Caruso is working on The Grove at Farmers Market, scheduled to open next year. Even Caruso’s competitors believe his project is so perfectly situated, between the Westside and the San Fernando Valley, that it will open to a shopping-starved greater Hollywood community.

“He’s 80 percent leased, he’s got a winner of a location, and he’s a top-flight developer,” said Cliff Goldstein, a partner at J.H. Snyder Co. “He has such a great location he could build that project in any economic situation and do well.”

While Caruso might pull extras out of his construction budget to make sure he gets his money back on leasing, Alex Rose, director of development for Continental Development Corp. in El Segundo, said what gets factored into the budget in the end depends on what a developer plans to do with the project when he’s done with construction.

“We always watch the budget. However, because we are a long-term holder, we are going to do what we feel we have to do to be consistent with class-A expectations in this market,” Rose said.

Not everyone is moving ahead with all cranes swinging. John Miller, Legacy Partners Commercial’s regional president for Southern California, said that economic conditions remain healthy for developers, but he is keeping a close watch on leasing activity across the firm’s portfolio.

“We’ve seen a slowdown in leasing activity, but we’re still leasing space,” he said. “Generally speaking, we’re on-plan with leasing.”

Virtually all industrial properties remain hot, and developers continue to push forward with new and larger projects without much concern about an economic slowdown.

Miller said that Legacy Partners has six land purchases pending in Rye Canyon Business Park in Santa Clarita. Deals for a total 20 acres should close this summer, he said.

“This is industrial space that is in high demand up there,” he said. “We haven’t seen any drop-off in activity.”

However, the Westside office market has seen a dropoff, mainly due to dot-com companies going out of business or downsizing dramatically. Kilroy Realty Corp. has 150,000 square feet of vacant space at its Westside Media Center, left open by the failed eToys. Still, President and CEO John Kilroy said, “We are in negotiation on all the square footage that’s there multiple times over. We feel that we’re well-positioned and the demand, while in absolute terms is not a boom environment, it is such that we’re not dropping our rates.”

Kilroy is less bullish on other areas. He has delayed plans to buy property and build in Westlake Village and is holding back on other developments around San Diego because of anticipated stagnation in those markets.

And generally that reflects the cautious attitude of many L.A.-area developers.

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