Avoiding Excesses Has Buoyed L.A.'s Tech Sector.

EVER since the 1970s, Los Angeles has been a laggard in the tech-based economy. Whether in the development of the microprocessor, personal computer, biotechnology, or the Internet, the region has struggled to find a strong identity linked to any particular technology.

Yet today, oddly, L.A.'s more deliberate pace of tech development may be working in its favor. As tech-driven growth -- particularly related to telecommunications and the Internet -- has slowed, the county's relative lack of new development and broad array of stable, diversified companies may be something of an advantage.

How things have changed. Just a week ago, the San Francisco Chronicle, which for a decade has crowed unceasingly about Bay-town's ascent to tech-nirvana, wrote a long, remarkably glowing account of Los Angeles' economy. Our region, the author glumly admitted, "has replaced the Bay Area as the main engine of the state economy."

Another observer who is now struck with L.A.'s relative good fortune is Orange County-based real estate analyst Dennis Macheski. For most of the past five years, his region blossomed as venture capital poured in. But now Orange County, particularly the formerly burgeoning southern areas, is suffering massive run-ups in vacant space. "There's too much supply being put on while demand is contracting," he says.

In many ways, it's an issue of timing. Tech-led growth in the late 1990s, which has now ebbed, sparked a huge building boom that brought 5 million square feet of new space into the county, with another 3 million square under constriction or already planned. That's a 12 percent increase in the total office and research and development space available in less than five years.

Most severely hit, Macheski notes, has been the southern end, which has been particularly attractive to tech oriented companies. South Orange County is a classic nerdistan -- largely newly built, almost entirely upscale office parks, connected by a network of toll roads and superhighways to planned, often gated communities inhabited almost entirely by college educated professionals and technicians. The vacancy rates in South County, covering the area from Irvine to San Clemente, has doubled to more than 19 percent last year, the highest in the Southern California region, including even long distressed downtown Los Angeles.

'Nerdistans' suffer the most

Southern Orange County is not alone. Some once dot-com oriented urban areas, such as San Francisco and lower Manhattan, are experiencing large scale downturns. But for the most part it's the outlying suburban nerdistans -- from Silicon Valley to Austin, suburban Denver and the Dallas "Tech Corridor" -- that have suffered the greatest fall from grace.

In the Austin market, annual rents once as high as $30 a square foot could soon decline to as low as $20 a square foot. Vacancy rates, particularly in sublease space, have rocketed over the past year from barely 3 percent to as high as 14 percent.

Austin's problems, a Dallas developer notes, have been exacerbated by the enormous hype surrounding that market, which led developers and investors to ignore slowing absorption over the past year. Three million square feet of new space is scheduled to hit the market by 2002. "The problem is the real estate people believed the press," the Dallas developer notes, "and thought having extra space would never be a problem."

By contrast, L.A.'s tech regions -- Pasadena, South Bay, the 101 Corridor -- have several critical advantages over the rivals in Northern California, South Orange County and elsewhere. For one thing, they experienced less rapid growth of inventory during the late 1990s, which means there is less excess space to be absorbed during the secular downturn. Relatively under-hyped by the national media and under-funded by venture capitalists, companies that grew in this region, for the most part, did so organically.

L.A.'s a bargain

Housing prices are likewise not at the extreme levels that have become locked in for the Silicon Valley, and to some extent, Southern Orange County. By contrast, suggests Macheski, places like the San Fernando Valley are relative bargains.

Perhaps L.A.'s strongest suit may be its breadth and diversity. With the exception of Santa Monica and a bubble around Idealab in Pasadena, most tech growth has come in a remarkable array of industries -- from defense technologies to digital entertainment -- that generally have been less subject to the wild ups and down of the Nasdaq.

Industrial vacancy rates along the 101 and across the county's other tech areas, from the Chinese-tech annex of the San Gabriel Valley to the South Bay, have remained remarkably stable.

Some of this has to do with our difficult past, suggests Rohit Shukla, president of the L.A. Regional Technology alliance. The area's long connection with the defense industry squashed net demand for new industrial space in the region for almost a decade. It took time to redeploy -- often into other defense-oriented fields.

In a dramatic reversal of fortune, the Los Angeles tech and office market seems like a relative rock of Gibraltar compared to once high-flyers like Silicon Valley or Lower Manhattan. "You look out the window here," said Grubb & Ellis Senior Vice President Gray DeFevere, from his Ventura Boulevard offices, "and all those high-rises out there are full."

A similar picture can be seen in the industrial parks from Chatsworth and Warner Center out towards Thousand Oaks. In fact, DeFevere points out, these areas have become more attractive because companies are seeking more affordable locations. Of course, a continued tech recession will also impact the region, but not with the force that is being felt in other areas.

For Los Angeles, these changing conditions represent an opportunity to recover the sense of technology leadership that has slipped away during the last generation. Now it's up to local leaders to seize the initiative to make sure that when the next boom occurs, Southern California will both avoid the excesses and not lag too far in the rear.

Joel Kotkin is a senior fellow at the Davenport Institute for Public Policy at Pepperdine University and at the Milken Institute in Santa Monica.