Southern California's 21st Century Leap Into A Global Arena
By Richard M. Cannon
The movement of information, products and services from one location to another is integral to every business transaction we conduct. As we hurtle through the Information Age into the 21st Century, the speed and efficiency in which we transport our information, products and services has become increasingly important to business success.
That is why the Southland's ability to further its status as a world class leader in national and international trade, commerce and economic affairs will also be dependent on its ability to service the demands of an entirely new class of industries driven by speed, productivity and efficiency.
Currently, Southern California is experiencing a massive, unprecedented $45 billion infusion of capital into its transportation infrastructure that promises to increase the region's ability to operate on a global level. This is an investment so remarkable that few nations could undertake such a massive amount of at-grade transportation development.
Of course there is much more to consider if this momentous leap forward is to be successful. Southern California's ability to expand and evolve as a world trade power will also be measured by its ability to service and support the companies utilizing these new transportation networks. The reality is that our evolving infrastructure will not only transport our economy into a new world class status but it will also propel our industrial real estate base into a new era of efficiency and service.
To truly understand the full impact of the Southland's burgeoning transportation network, it is important to understand the scope of the capital investment currently being made in Southern California's infrastructure. Within a roughly 20-year time period, from 1990 to 2010, close to $45 billion will have been invested in our at-grade transportation system. The projects included in that investment are: Alameda Corridor Project; the expansion and revitalization of the Ports of Los Angeles and Long Beach; expansion of the Los Angeles International Airport (LAX); expansion of the airports at Ontario, Burbank and Long Beach; the probable development of an airport at MCAS, El Toro; new freeway construction and massive freeway expansion and retrofit; new toll roads, and the development of the Los Angeles subway and mass transit system.
To better envision the real impact of these proposed networks on our economic future, let's take a closer look at a few of these economic engines, the Alameda Corridor Project and the ports of Los Angeles and Long Beach.
As it is planned, the Alameda Corridor Project, an infrastructure project of national significance, will consolidate port-related train traffic onto a 20-mile high-speed, high-capacity and full-grade-separated transportation corridor linking the San Pedro Bay Ports with key transcontinental rail yards near downtown Los Angeles. It will also widen and improve the highway paralleling the rail corridor and will consolidate 90 miles of rail operations into a single 20-mile high-capacity rail facility used by the nation's largest rail carriers. When completed, the project will eliminate 200 at-grade railroad crossings and widen and improve Alameda Street, the major highway adjacent to the rail facility.
The Port of Los Angeles has been dedicated to ongoing infrastructure improvements, regional economic and commercial development, environmental mitigation and a global vision in its future planning. The vast infrastructure that comprises the Port of Los Angeles and the magnitude of business that the Port generates are testimony to its financial strength. In fiscal year 1995, the Port handled a total of 74.7 million metric revenue tons in imports and exports and posted annual container volume growth from 2.38 million TEUs in fiscal year 1994 to 2.64 million TEUs, an 11 percent increase. Even now, the port is undertaking a complex capital improvement called the Pier 300 / 400 Implementation Program. The scope of the Pier 300/ 400 Project includes 24 separate-but-related projects, including a number of infrastructure improvements at a value close to $600 million.
The Port of Long Beach is already the nation's busiest seaport and remains one of the leading seaports in the world. In its 1996 Annual Report, the port's recorded total containerized cargo both inbound and outbound was 59,120,423 Metric Revenue Tons (based on 1,000 kilograms or one cubic meter), an increase of 9.6 percent from the previous year. Massive expansion plans for the port are already in progress.
For Southern California, the Corridor and the Ports of Los Angeles and Long Beach, are but two aspects of the globally significant level of capital currently being invested in Southern California's transportation system.
It is from this point we can examine the critical impact of this investment on the existing base of real estate in and around the regions serviced by these transportation networks and grasp the importance and magnitude of this $45 billion investment in our regional economy's future.
Because the dollar magnitude of this at-grade transportation investment is so hard to visualize, consider the following examples of capital investment when related to building development.
The first example quantifies the capital used to develop all of the office buildings in downtown Los Angeles. CB Commercial reports there is 30 million square feet of office space in downtown Los Angeles that has been developed over the past 60 years. If you assume an average costs of $200-per-square-foot, this represents a total capital investment of $6 billion.
In comparison, our current infrastructure investment of $45 billion is equal to the creation of more than seven downtown Los Angeles'. Moreover, this investment is being expended in one third the amount of time it took to develop the entire Los Angeles office market.
Let's look at this investment from another perspective. In a five-county region that includes Los Angeles, Ventura, Orange, San Bernardino and Riverside counties, there is a total of 1.2 billion square feet of industrial space that has been developed since around 1930. Let's assume that it cost an average of $37.50 per square foot to construct this space over the past 60 years. Considering this formula, our current $45 billion transportation investment is equivalent to the total dollars spent to develop every industrial building in Southern California in, again, one third the time.
So, for the real estate community, what are the benefits of this capital infusion and how does it impact our current industrial real estate base?
First and foremost, commercial real estate values will increase. Whether you own land or property in central Los Angeles or the farthest reaches of the Inland Empire, your real estate will be positively impacted by this state-of-the-art transportation investment. The reason is simple, as the true value of this infrastructure development is realized and utilized, opportunity for growth in international trade and commerce will also expand. In addition, Southern California's ability to compete as a premier location for business and investment will dramatically increase thus attracting new companies and industries to the area and providing a strong foundation to retain and expand existing ones.
The region's massive state-of the-art transportation system will also aid in the potential for powerful amounts of new, fresh capital invested in above-grade building improvements. Three recent examples of this new invigorated wave of development include the planned Los Angeles Sports and Entertainment Complex and significant expansions already in the works by Disneyland in Anaheim and Universal Studios in Universal City. New projects like these increase the region's quality of life and aid in building new industries and expanding existing ones such as tourism and entertainment.
A further benefit of this 21st Century infrastructure is the accelerated growth in Southern California of new and existing industry clusters including: manufacturing, diversified aerospace and defense, wholesale trade, logistics, high technology and service. Moreover, these new industries bring added benefits of increased sales tax revenue and employment opportunities.
This new business growth will also aid in efficiently and effectively creating a Southland marketplace of cooperation rather than competition. Even now, Southern California's submarkets are defined by the industries they serve.
The Inland Empire is already home to mega-size industrial buildings housing mega-size companies and industries. The South Bay is clearly the first choice for logistics companies. Orange County has created a critical mass of research and development-related industries and, of course, the San Fernando Valley and the West Side will continue to serve Southern California's wealth of entertainment and related industries. With its new infrastructure base in place, Southern California will be a myriad of complimentary markets, each serving its own strengths, as opposed to one built solely on competition without growth.
New infrastructure, especially the Alameda Corridor Project, will also improve the lives of Southern California's citizens by alleviating gridlock and separating people from increasing cargo and freight traffic. Also, by providing citizens with a better, more flexible and integrated transportation system we can move goods in and out of Southern California and its surrounding trade regions faster and more efficiently.
All of this growth and opportunity also portends an important new era of construction and redevelopment for Southern California's real estate community. From Watson Land Company's perspective, this new era of opportunity is exciting.
As the largest developer of industrial centers in Los Angeles County, and among the largest industrial developers in the nation, Watson Land Company has masterplanned and developed more than 1,000 acres of industrial and commercial property encompassing more than 9.6 million square feet of industrial, office and technology buildings and business centers.
A majority of Watson's industrial base is in the South Bay which is why we are committed to attracting leading international manufacturing companies to the region. Companies who can benefit from the locational resources of the seaports, rail lines and airports.
In many cases, our lease transactions include a number of companies with strong distribution needs and specific facility requirements critical to their operations. The transactions speak volumes about the importance major global companies place in their building requirements, support services and basic locational advantages. Moreover, many of our existing tenants are expanding and making a significant investment in their individual facilities through new equipment and improvements.
They are important to note because they are also indicative of the importance of accelerating the timetable for changing and upgrading land use patterns and recycling land and buildings in Southern California to meet the increasing needs of industries looking to move product efficiently and effectively.
Let's take a look at the existing 1.2 billion square feet of existing industrial inventory in Southern California. Close to 80 percent of this industrial product was built over 20 years ago.
This means we currently have an aging inventory of facilities fraught with functional obsolescence, design inadequacies, environmental problems, lack of code compliance, structural deficiencies, and absence of expansion opportunities. More importantly, this reflects an inventory of facilities incapable of meeting the needs of the new industrial user.
Southern California's current level of infrastructure development has provided us the immediate push to embark on a heretofore unimagined and massive recycling of our industrial building inventory. Let's consider for a moment what that new product will and should be. It will be a state-of-the-art industrial building that responds to a users need for efficiency and bottom line results, functionality and better utilization and cost effectiveness through value-added benefits and services. This product will be so efficient and flexible that it has the potential to make many existing industrial product in Southern California irrelevant and cost-prohibitive and far less valuable over time.
As developers and owners of industrial real estate we must bear in mind the new type of leading-edge, state-of-the-art industries that will be housed in our facilities and make adjustments for the new millennium. Today, Southern California is poised to leap into the 21st century with gusto. Our further progress is possible because we continue to reinvest in a solid world-class transportation system and a new and healthier industrial base. Given this transformation, the Southland will continue its dominance as a strategic location for commerce and global trade.
(Richard M. Cannon is President and Chief Executive Officer for Watson Land Company, one of the South Bay's largest landowners and Southern California's largest developer of master planned industrial centers.)
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