Beached?

Santa Monica's No-Growth Attitude is Unwise in an Economic Slowdown

WITH a national downturn, or even a recession, now at hand, there is ample reason for businesses to look again at the assumptions about growth patterns in future. The "winners" of the 1990s may not necessarily be those best positioned for the tougher times that loom for the early 2000s.

Ever since the L.A. economy struggled back from death's door in the mid-1990s, much of the prosperity in the region has been concentrated on the "boutique" parts of the regional economy, most notably Santa Monica.

Once a somewhat rundown seaside town, Santa Monica in the 1990s emerged at the epicenter of L.A.'s digital economy. Like counterparts such as lower Manhattan, South of Market San Francisco and Boston's "cyber district," the beach city became the favored locale for aspiring Internet-based firms, trendy entertainment and other new-media ventures. Santa Monica became the local poster child of the digitally driven Boutique City.

In the process, Santa Monica saw soaring rents, plummeting vacancies and ever greater pressure for new development-even given a widely perceived anti-business mood in the city.

But now, with the collapse of tech stocks and a general economic slowdown, that process has slowed and even started to reverse.

Although office vacancies remain in the single digits, recent evidence shows that they are now climbing rapidly.

Like fellow high-priced boutique districts in San Francisco and lower Manhattan that are seeing millions of square feet dumped on the market by retreating dot-coms, Santa Monica is also suffering from the cyber implosion. One troubling sign: This winter, a deal to sell the city's swank Water Garden II to New York buyers - rumored to be Lazard Freres & Co. - for an estimated $260 million fell through, in part as a result of concern over the dot-com sector.

Given the collapse in new media and dot-com stocks, and the growing need for companies to pay closer attention to costs, there are enough basic economic reasons to make investing and locating in these high-priced areas less attractive in the short run. But in addition, there's a political factor that can't be ignored: the recent further leftward shift of the city under Green Mayor Michael Feinstein.

Of course, for years the city has been largely controlled by "progressive" politicians whose main constituency was the "renters' rights" movement. Yet despite this, Santa Monica, particularly during the dark days of the long Southern California recession of the early 1990s, also allowed for significant new hotel construction and development along several critical corridors, including around the now wildly successful Third Street Promenade.

But years of heady growth and rapid gentrification has changed the political tenor in Santa Monica, just as it has in San Francisco. As in Santa Monica, San Francisco's new antigrowth coalition consists of neighborhood activists, freelance radicals (sometimes funded by left-leaning foundations), as well as those who fear, with considerable justification, that they are being priced out of the city.

"You have an anti-development, anti-gentrification, anti-improvement mood that's developed here," notes San Francisco real estate analyst Mark Borsuk. "These people actually want to see derelict businesses."

The politics of these groups really represent a new kind of political phenomena. Traditionally, left politics concentrated on the issue of securing more material goods for traditional out-groups, such as minorities or labor. Today's new political thrust really represents what San Francisco political scientist Richard DeLeon has labeled "post-material populism." Essentially, post-materialist ideology blends anti-growth sentiments with more traditional '60s-style "progressive" cultural views embracing environmental, minority, neighborhood and labor concerns.

The addition to labor, or at least parts of labor, to anti-growth forces represents perhaps the most critical change. In the era of former L.A. Mayor Tom Bradley, for example, organized labor, while still pushing for "social justice," also embraced a growth agenda that was shared by business.

But today, growth is less important to labor. Part of the reason for this change is that, increasingly, much new business, whether in fields such as new media or in the building trades, is non-union. Another key factor is that public employee unions now dominate the union movement -- and they, for the most part, do not see the expansion of the private-sector economy as among their primary concerns.

What is the "post-materialist" agenda, as it is unfolding in places like San Francisco and Santa Monica?

Much is oriented towards slowing, or even reversing the growth that made the city the epicenter of the L.A. region's burgeoning digital economy over the past five years. Restrictions on new construction, particularly along the prized coastal areas, have been imposed, and new environmental and zoning ordinances could further slow development. The recent rejection of a new Target store proposed for the city's downtown may reflect the increasingly strong anti-growth mentality.

Perhaps most worrisome of all, a proposed "living wage" ordinance seeks to guarantee wages of over $10.69 an hour in the coastal zone of the city -essentially doubling the minimum wage.

In the past, these ordinances, passed in many affluent urban centers, targeted only people doing business with the city; now, they are being expanded to include purely private-sector employers as well.

Ironically, all these moves are now reaching fruition precisely when growth is slowing, making companies more wary of higher costs. Bad economic conditions and radical politics make a potentially disastrous combination.

So why now? It is simply a product of political "lag." It takes years for growth conditions in places like San Francisco and Santa Monica to settle in to the point that enough city residents feel threatened by rising rents and perceived loss of "character" to favor turning back the clock. By the time the politicians act, the reasons for acting may have already been reduced or eliminated.

Will there be any beneficiaries from the twin trends of tightening economic conditions and renewed political activism?

Hard times in Santa Monica and a growing aversion to high costs could bring new opportunities to less-chic regions. Pressures on profits - now that Wall Street is demanding them - could fuel a movement away from places like Santa Monica-based firms, and towards cheaper locales inland. Most recent analyses of trends in greater Los Angeles show falling vacancies in once-disdained areas such as the San Fernando Valley and Wilshire Center, while those in some pricier parts of the Westside, where rents can be twice as high, are beginning to rise. A similar pattern can be seen in residential real estate, with the Valley and Eastside locales now experiencing more robust growth than their more-expensive coastal counterparts.

Yet it is still unclear that some areas of Southern California - notably the Central and Eastside of Los Angeles - will be able to fully take advantage of the new conditions. Again, the problem lies in politics. The next L.A. City Council could be even more "post-materialist" than the current bunch. Unless Steve Soboroff, or perhaps Joel Wachs, is elected, the next mayor will be far more under the thumb of activist groups and public employees than Richard Riordan.

What we may see, as we did during the last recession, is that smaller independent cities - Burbank and Culver City - may be better positioned to withstand and even benefit from a downturn. There may also be some hope for largely Latino-run "Gateway cities," whose constituents are too busy aspiring to embrace "post-materialist" politics. It may be time for those who have been running behind during the booming 1990s to get a new lease on life in the sagging 2000s.

Joel Kotkin is a senior fellow at the Davenport Institute for Public Policy at Pepperdine University and at the Milken Institute in Santa Monica. He is the author of "The New Geography: How the Digital Revolution is Reshaping the American Landscape."