Santa Monica: How the People's Republic Became a Business Mecca

Why does L.A. need to subsidize offices downtown when Santa Monica has developers banging on the door?
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On Sunday, Oct. 9, Los Angeles Times columnist Steve Lopez took the City of Los Angeles to task for subsidizing the move of the Gensler architectural firm from Santa Monica to downtown Los Angeles. In addition to the three-year tax holiday Los Angeles gives all relocating businesses, city officials used $1 million of federal anti-poverty funds to fund tenant improvements.

A week later, on Sunday the 16th, the Times, in an article assessing the office real estate market in Southern California, found that by a large margin Santa Monica, the city from which L.A. lured Gensler, had the strongest office market in the region, with the lowest vacancy rates and the highest rents. While L.A. needs to subsidize office development, developers are clamoring to build more offices in Santa Monica.

So what gives? Why does L.A. need to subsidize offices downtown when Santa Monica has developers banging on the door?

Readers might immediately respond that, "it's the beach" that makes Santa Monica more attractive, or the fact that it is part of the wealthy Westside of L.A. But from the long-term perspective, nothing was inevitable because of location. Beach or not, 30 years ago, Santa Monica was a dump.

In the '70s, the city's biggest employer, Douglas Aircraft, had departed for Long Beach, and other factories in the city's industrial core were shutting down. Malls in nearby cities had decimated the City's retail businesses. Santa Monica's once thriving downtown, notwithstanding a few high-rises that had been built on Ocean Avenue and a redevelopment agency-subsidized shopping mall, was dead. The Pier was so decrepit the City almost demolished it. Main Street in now trendy Ocean Park was a skid row.

In 1980 downtown L.A. was similarly depressed, but it had many advantages, most notably its being the hub for the region's transportation infrastructure, which grew over the next 30 years to include multiple rail connections including a subway to Hollywood and the San Fernando Valley, MetroLink commuter lines, and light rail connections to Long Beach, Pasadena and East L.A.

No, it wasn't location. The real difference that determined Santa Monica's success and L.A.'s failure to develop a self-sustaining, non-subsidized commercial real estate market was in governance. Thirty years ago left-wingers, riding the rent control movement, took control of Santa Monica politics and since then their policies have turned Santa Monica into a Mecca for business.

No, that's not what anyone expected 30 years ago when, as William Fulton documented in the first chapter of his seminal book about Southern California, The Reluctant Metropolis, Santa Monica became the first city to confront the Southern California "Growth Machine." As soon as the Left took control, the city council declared a moratorium on development and forced developers to negotiate public benefits before they could build.

Santa Monica followed that with citywide down-zoning, and although the City has approved much commercial development since 1981 -- nearly 10 million square feet -- when dealing with private developers negotiations have always focused on balancing the amount of development against what public benefits, often costly, the City can extract.

No surprise, but the development approval process is proverbially long and costly in Santa Monica. It goes without saying that Santa Monica has never given a tax holiday to any business moving into the city. Yet the developers keep coming.

Contrast that to downtown L.A., where it seems that nothing gets built without subsidy. Take the L.A. Live development by Anschutz Entertainment Group (AEG). While it's hard to sort all the goodies out, the trade magazine Building Trades News says AEG received $290 million in subsidies and tax breaks, in addition to the benefit of having the land for the project assembled by the City of L.A.'s redevelopment agency.

By now, the City of L.A. has been subsidizing development in downtown Los Angeles for generations. They're not going to stop, but you'd think that for all the money it has spent, L.A. would at least have got a district that could attract business on its own.

Yet no private developer has built an office tower in downtown L.A. for many years; in fact, older office buildings are being converted to apartments and condos. While that's a good use of old office buildings, in downtown Santa Monica a 1929 office building, without parking on-site, was rehabbed a few years ago and now fetches some of the highest rents in the region -- $6 per month per square foot.

So -- why do businesses want to do business in Santa Monica?

The answer is that Santa Monica has concentrated on public services to make the city a good place to live, and good places to live are also good places to work. While L.A. used redevelopment to subsidize office towers, which privatized the benefits and sucked development potential from the rest of downtown, Santa Monica has spent most of its capital on facilities that are open to the public or that benefit the public, such as parking structures, its bus system, parks, libraries, and affordable housing.

Santa Monica also down-zoned, which property owners opposed, but which had the effect of spreading the potential for development around to more properties at the same time that it reduced "supply." Down-zoning is supposed to make land worth less, but this made development rights more valuable.

You don't make anything more valuable by giving it away, which is what the City of L.A. does when it subsidizes oversized projects on favored developers' properties, which means that the values of everyone else's properties decline, discouraging investment.

An element of urban design is also involved: those subsidized skyscrapers in downtown L.A. place massive infrastructure demands on small footprints, turning surrounding streets into automobile-sewers. This further reduces value, since nobody chooses to work in such an environment.

You want a good business climate? Turn your city's government over to the Left.

Frank Gruber writes a weekly column on local politics, which often involve land use issues, for the Santa Monica Lookout News, a news website. His first book, Urban Worrier: Making Politics Personal, was published by City Image Press.

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