What to do when the defense plants close.

One of the biggest questions facing Southern California is what to do with the huge volume of office and industrial space that has been left empty by the downsizing of the defense industry. Much of that space is concentrated in El Segundo, where defense firms currently occupy 10.1 million square feet of space, down from 11.2 million in 1992. In the most comprehensive study of local defense industry buildings to date, Kenneth Leventhal & Co. recently issued a report titled "Real Estate Strategies for a Changing Defense Industry." The report notes that, "Unless new uses can be found for this surplus real estate, these properties could remain vacant for years, depressing local economies and real estate markets." The report makes a number of recommendations for recycling the defense industry space. It also includes an appendix describing 18 sites in the United States where buildings comparable to those in El Segundo have been successfully converted to other uses. The following article is excerpted from that report and is reprinted here with permission, Copyright 1994, Kenneth Leventhal & Co.

The redevelopment or adaptive reuse of functionally obsolete buildings has been widely applied, as we learned in researching 50 such projects throughout the United States. These projects involved the recycling of multiple buildings or large acreages, conversion to a variety of commercial and residential uses, and public/private partnerships between local governments and private developers and investors.

Based on this broad research, we focused on 18 projects that may have applications in El Segundo. As part of our project research, we conducted detailed telephone interviews with owners, developers, project managers, and other individuals who were knowledgeable about these projects including such details as previous use, construction costs, fiscal and economic impacts, and the extent of public and other financial assistance.

In examining these projects, we found there is no panacea for the problem of redundant buildings. An array of reuse strategies TABULAR DATA OMITTED was employed, each adapted to the needs of the individual owner, end-users, and the particular community.

These projects included: industrial buildings converted into high-end factory retail outlets; corporate headquarters recycled into research facilities; commercial buildings transformed into residential apartments for downtown workers; and educational facilities converted into high-tech incubator buildings. While these projects clearly resulted in more productive uses of the real estate, they usually did not generate the same fiscal and economic benefits as the original use. This suggests that it is more cost effective to retain a building's existing businesses than to recycle and market the property to new companies. Of course, this is not always possible. It is unlikely that all of the buildings owned or leased by defense contractors will continue to be used for defense-related businesses. El Segundo commercial property markets generally are beginning to recover, but the recovery has been slower in Southern California than in most other regions. Under these circumstances, El Segundo may have to consider interim uses for redundant buildings such as parking or public storage. When market conditions improve, these properties can be permanently converted to higher, more productive and, for the owners, more profitable uses.

In El Segundo, as in many other markets, a challenge in recycling properties is that demand may increase more slowly in the future. In the office sector, for example, businesses are learning to make more efficient use of space, which has helped them to increase productivity and better control costs. However, this has also exacerbated the problem of surplus space. Consequently, targeted market research and careful planning are necessary to ensure that adaptive reuse projects are successful.

El Segundo may have limited opportunities to develop destinational retail projects such as "power centers." Detailed research is necessary to determine whether demand will support such projects. We did not study the residential market in El Segundo. However, based on our analysis of the 18 reuse projects, we found that industrial facilities can be successfully converted to residential uses. Moreover, such projects could create demand for mixed-use development. In El Segundo, any residential development should be targeted to the adult market to minimize the fiscal impact on schools and should be carefully planned to minimize conflicts with industrial neighbors.

Other potential uses require research. These include sports stadiums, theme parks, casinos, movie sound stages, and studios. Based on the success of other cities with redevelopment/adaptive reuse projects, El Segundo should exploit its proximity to regional transportation systems including Los Angeles International Airport, light-rail lines, and freeways. These link El Segundo with a large, diversified, and educated work force in the metropolitan Los Angeles area. Transportation access is important in attracting businesses to El Segundo.

POTENTIAL FUNDING SOURCES

The Federal Technology Reinvestment Project (TRP) is a five-year federal program that provides about $20 billion in funding for assistance to defense workers, personnel, and communities; dual-use technology development; and technology deployment. In addition, there are a number of other such "defense conversion" programs. Of 44 programs that we researched, the majority are federally funded. Eleven are funded by the state of California.

However, most of California's investment has been in providing the matching funds required by the TRP. Although the federal government has committed substantial resources to defense conversion programs, it generally awards funds based on an extremely competitive process. In the first round of TRP, a total of 2,800 funding proposals were submitted from organizations around the country. Indicative of the competition, only 162 program grants were awarded.

Competition will become even more intense as funding diminishes over the TRP's five-year period. Moreover, a number of these other federal programs require local communities to show "blight" by demonstrating that the community has experienced economic dislocation from the loss of high-tech defense jobs.

This may be difficult to establish in the case of El Segundo, since many of the displaced workers live elsewhere. It was recently reported that California-led organizations won approximately $59 million, or 42 percent, of the $140 million in first-round defense conversion grants.

Most of these were in the technology development area. For the first rounds of the TRP, the state of California identified $62 million from existing state programs and agencies to be used for state matching funds to attract federal defense conversion grants, mostly through the TRP. In addition, several of the significant legislative initiatives signed into law in 1993 should help accelerate defense conversion efforts through enhanced coordination and streamlining of procedures.

Although El Segundo has instituted a number of business retention programs, it has few economic development tools at its disposal. The most significant is redevelopment financing; however.

El Segundo would have to adopt a redevelopment project area in order to access tax increment funding. Adoption of a new redevelopment project area can be a lengthy and sometimes controversial process, requiring up to three years for preparation of the necessary findings, studies, and environmental clearance. Additionally, recent reforms to the California Redevelopment Law (AB 1290) have made it more difficult for new redevelopment areas to be adopted.

RECOMMENDATIONS

Although El Segundo has taken initiatives to attract businesses to the city, the profound structural changes in the defense industry require it to take a more aggressive approach in finding new users for its considerable inventory of surplus real estate. In partnership with large landowners, it needs to develop a strategy that includes creating a Defense Conversion Task Force to coordinate conversion efforts at the local, state, and federal levels. The following are issues the task force could explore:

* Streamline planning approvals.

* Modify zoning in designated areas.

* Prepare an Environmental Impact Report (EIR) master plan to expedite environmental clearance.

* Review and modify the business tax structure to encourage firms to remain and expand in El Segundo.

* Retaining a market-driven planning team to explore specific reuse concepts at designated sites.

* Demonstrating flexibility in adapting zoning requirements to market demands.

* Petitioning the DOD, with the assistance of the EDC and elected officials, for targeted funding to mitigate the adverse economic impacts resulting from any future defense cuts (namely, the loss of the Los Angeles Air Force Base and The Aerospace Corp.).

* Sponsoring jointly, with private industry, a public/private workshop to explore reuse opportunities at key designated sites, and exploiting opportunities created by El Segundo's proximity to Los Angeles International Airport. LAX is likely to undergo a major expansion in passenger travel and air cargo due to the recent passage of the NAFTA and GATT trading pacts.

Conclusions

Unless new uses can be found for El Segundo's substantial inventory of surplus office, manufacturing, and industrial space, vacancy rates are likely to increase even more. This assuredly would be detrimental to the city's financial health, given its traditional reliance on the defense industry for a substantial part of its general fund revenues.

A slowdown in defense-related business activity not only reduces the city's income from business license fees, an important source of revenue, but also results in reduced spending at the city's hotel, service, and retail establishments.

Lacking many of the traditional economic tools, including redevelopment financing, El Segundo faces difficult challenges in adapting to the downsizing of the defense industry. It may be able to apply strategies used by other communities in recycling surplus real estate.

The case studies show that an aggressive but reasoned response to market opportunities will help mitigate the adverse impact of dramatic reductions in traditional employment generators. Given El Segundo's strategic importance in Southern California, its success in creating and implementing redevelopment and adaptive reuse programs could benefit the entire region.