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Milken

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BENJAMIN MARK COLE

Senior Reporter

Michael Milken believes that downtown Los Angeles, as well as downtowns across the country, are in a state of irreversible decline.

Concurring with the findings of economist David Birch of Cambridge, Mass.-based Cognetics Inc., Milken said the real job-producers of today and tomorrow are locating well outside the urban core.

“You can rent entire floors of suites in downtown Los Angeles for a fraction of the cost of just the improvements, but still companies are locating in Century City, or West Los Angeles,” Milken said at a seminar last week at the Milken Institute for Job and Capital Formation in Santa Monica.

The conclusions of Milken and Birch were bolstered last week by a new study from the USC School of Urban and Regional Planning that found successful immigrants tend to move away from the central city and into the suburbs.

Such a dark outlook is a stark contrast to the rosy vision of a downtown renaissance being touted by local political and business leaders who are supporting a proposed $200 million downtown sports arena.

Downtown supporters contend the city’s center is on the verge of a dramatic comeback due to an improving local economy, the possibility of a new sports arena, adjacent entertainment/retail complex and major convention hotel, a new Catholic cathedral complex, a copious supply of relatively inexpensive office space, and maybe even a new NFL football stadium.

But Milken and Birch cast doubt on such a scenario by citing the propensity of small and rapidly growing companies so-called gazelles to locate outside urban cores.

“Center cities are dying, and the further you go from the center city, the faster the economic growth,” said Birch, armed with diagrams of Atlanta and other U.S. metro areas. “Gazelles do not want to be downtown.”

Milken spoke at the end of the seminar, and said that he recognized many attendees found unsettling the “reality of (Birch’s) prediction of the demise of central cities.”

But he posed the rhetorical question: “As the head of a for-profit company, do your shareholders want you to solve the problems of downtown Trenton or Los Angeles?”

The national trend is manifesting itself in L.A. with fast-growing high-tech and entertainment companies steering clear of the abundant office space in downtown Los Angeles, preferring Burbank or the Westside, noted Milken and others last week.

Areas even farther out Calabasas, Agoura Hills, Chatsworth and Valencia are also enjoying strong growth.

Future demand for downtown office space will be so weak that “there will be no skyscapers built in the United States ever again,” said Birch, describing a skyscraper as any tower with 50 floors or more.

In the knowledge-based economy, there are substantially reduced needs for geographic closeness, said Birch, who called downtowns “obsolete.”

In outlying areas, where land is cheaper, skyscapers don’t make sense.

In the Los Angeles market, Valencia-based Newhall Land & Farming Co. is planning to develop the Santa Clarita Valley’s first executive housing as part of its massive Newhall Ranch project near the Six Flags Magic Mountain amusement park.

The explicit strategy of building executive housing is to attract companies to the area an example of the kinds of competition faced by downtown L.A. skyscraper owners, who currently face vacancy rates around 20 percent.

But downtown denizens last week remained adamant that a revival of Los Angeles’ Central Business District is inevitable.

The City of L.A.’s approval of the proposed downtown sports arena, if it comes to fruition, would infuse the core with new vigor, said Kathryn Schloessman, senior vice president with downtown-based brokerage CB Commercial Real Estate Group Inc.

“The sports arena is going to spur a lot of mixed-use development and new hotels,” said Schloessman.

“Entertainment companies are filming downtown, often in the old Unocal headquarters. And I think when the sports arena goes in, you are going to find entertainment companies much more willing to locate downtown.”

For Los Angeles Mayor Richard Riordan’s administration, last week’s comments by Birch and Milken and the new USC study present a conundrum.

The Mayor’s Office has embraced small, growing businesses as key to the economic vitality of Los Angeles. In fact, the city’s 1994 “The New Economy Project Final Report” is laced with references to Birch.

But now Birch has said fast-growing small businesses are the very enterprises that will snub the central parts of Los Angeles, instead choosing “edge” cities, such as Calabasas, or, to a lesser extent, Santa Monica, Burbank, Glendale or the South Bay and the northern rim of Orange County.

At the Mayor’s Office, the plan is to make downtown the sort of place people congregate for fun, not necessarily just business.

“I think the economies of downtown are changing. The vibrant downtowns become entertainment centers that draw poeple into them,” said Gary Mendoza, deputy mayor for economic development.

“We have to capitalize on the sports arena. The plans being built around the arena are stunning.”

But when asked if the arena would reduce office vacancy rates downtown, Mendoza replied, “I’ve not seen an analysis on that.”

Another trend contributing to the demise of central cities, Birch said, is the dwindling size of America’s middle class.

Heavy job turnover and a dearth of middle-class jobs are pounding the American center, he said. “One-third of Americans have jobs that will be eliminated in the next four years,” he said. “This has created enormous economic insecurity, a great sense of anxiety. They are scared to death.”

Perhaps related to that economic insecurity, birth rates have been steadily dropping and will hit depths not experienced since the Great Depression, noted Birch. Insecure workers feel they can’t afford as many children, or any at all.

The smaller work force is also taking on an increasingly “bifurcated” structure, said Birch. He noted that in recent years the number of high-wage jobs and low-wage jobs have increased, while the number of middle-income jobs has decreased. “The investment bankers are doing great, and we have a lot of parking lot attendants, but not as much in the middle,” he said.

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