Seven years ago, Los Angeles Air Force Base (LAAFB), an aging military facility on three separate sites totaling 107 acres (43 ha) near Los Angeles International Airport (LAX), was threatened with closure by the Pentagon under the Base Realignment and Closure Act. The antiquated base, home to the Space and Missile Systems Center (SMC), the agency responsible for the design, sourcing, and procurement of space-based weapons for the military, was considered one of the most at-risk government facilities because, among other things, at 50 years old it did not meet current building codes for fire and earthquake safety.
Unless the Air Force could find a way to replace it with a new campus, the LAAFB was expected to be closed at an estimated immediate cost to the region of 13,000 jobs, not counting the tens of thousands of related engineering high-tech and support staff jobs expected to follow SMC to its new location, most likely in Colorado.
What saved the LAAFB was a first-of-its-kind approach that required an act of Congress—the Floyd D. Spence National Defense Authorization Act. Following an extensive request-for-proposals competition and an exclusive negotiation period, the Air Force traded a large portion of its existing land to a team of developers, including Kearny Real Estate Company, Catellus Development Corporation, and the Morgan Stanley Real Estate Funds, in exchange for the construction of a state-of-the-art SMC facility.
Under the agreement, the Air Force consolidated its base operations into the new 542,000-square-foot (50,400-sq-m) low-rise office campus housing SMC on a 52-acre (21-ha) LAAFB site in El Segundo. In exchange, the consortium received the two other vacated LAAFB sites—a 42-acre (17-ha) parcel in El Segundo and a 13-acre (5.2-ha) parcel in neighboring Hawthorne. Kearny Real Estate led the efforts to get entitlements for the new Air Force campus and for use of the excess properties for much-needed housing, then sold those excess properties to homebuilders Centex and William Lyon Homes. Entitlement included having Hawthorne annex the 42-acre (17-ha) LAAFB parcel in El Segundo and having the Hawthorne Redevelopment Agency pledge tax increment financing for the site.
As a result of the work on the LAAFB transaction and the site’s development, a close relationship developed between Kearny and Hawthorne, including the mayor’s office, municipal staff, and city council members. The mayor proposed to Kearny Real Estate that it participate in revitalization of the Hawthorne Municipal Airport, an aging general aviation facility also known as Jack Northrop Field.
Over the past two decades, very little in the way of capital improvements had been made at the 80-acre (32-ha) airport—located near the intersection of the 405 and 105 freeways, less than five miles (8 km) from LAX—and it had experienced a continuing decline in activity. In January 2005, a partnership of Kearny, Wedgewood, and Howard CDM entered into a 45-year ground lease agreement with the city for the non-runway portions of Jack Northrop Field.
“Although an airport was new to us, we saw a real estate opportunity in this underused asset,” says Kearny partner Hoonie Kang. “Airports are very expensive to build and no one is building any new ones. If you control an airport or land next to one, it is a pretty unique situation.”
Changes at the facility were im–portant to Hawthorne, says Mayor Larry Guidi. “As a major anchor for the east side of Los Angeles, Jack Northrop Field desperately needed to be revitalized,” he says. “It was basically a piece of land that was an eyesore and the city didn’t have the funds to improve or market it.”
After completing the entitlement process, including an environmental impact report (EIR), and an airport master plan, Kearny began up–grading the existing 75,000 square feet (7,000 sq m) of hangar space. Now that the first set of new hangars built at the airport in more than 30 years is completed—12 hangars with 1,800 to 3,900 square feet (170 to 360 sq m) of space—plans are to add hangars with 3,900 to 30,000 square feet (360 to 2,800 sq m) of space.
“[Whether] airport or office complex, basic real estate principles apply,” says Kearny managing partner Jeff Dritley. “Hawthorne airport is well located and underused. We are making the necessary improvements to reposition the asset to attract the larger corporate users who either didn’t know about the airport or avoided it altogether because it lacked the appropriate amenities.”
Consistent with its investment philosophy of controlling as many variables of a project as possible, Kearny and partners also acquired the existing fixed base operations in November 2004 and have integrated them into the Million Air chain of fixed operators.
After having seen no growth in air activity in the past 30 years, the facility is experiencing new life. The number of flights and use of the airport are climbing, with much of the activity attributable to an increase in corporate travel. With million-dollar turboprops and corporate jets becoming a more common sight, the airport is becoming a vital commercial attraction and has brought attention to the city’s once-blighted east side. Key to the economic revitalization has been the east side community’s renewed faith in Jack Northrop Field, says Guidi. The recent improvements there have encouraged $500 million in new or planned development adjacent to the airport.
Near the airport at Crenshaw and 120th Street is the Exchange, a mixed-use campus comprising more than 900,000 square feet (8,400 sq m) of renovated office and research and development facilities. AT&T has located its largest U.S. telecommunications data center there in a 290,000-square-foot (27,000-sq-m) renovated building. Across the street is a new retail center that includes a 135,000-square-foot (12,500-sq-m) Lowe’s Home Improvement store, fast-food restaurants, and other major retailers.
But the real estate opportunities in Hawthorne were not limited to the airport. In 2005, Vought Aircraft Industries (now part of Triumph Aerostructures–Vought Aircraft Division), one of the world’s largest suppliers of aircraft structures as well as one of Hawthorne’s largest employers, decided to sell its 2.68 million-square-foot (249,000-sq-m) manufacturing facility on 86 acres (34.8 ha) adjacent to the airport because it was consolidating its operations and no longer needed such a large complex.
Kearny, along with joint venture partner Morgan Stanley Real Estate Fund V, acquired the site for $61 million. As part of the deal, Vought leased back the entire property for six months as it consolidated. Once that was complete, Vought signed a five-year lease for 1.38 million square feet (128,000 sq m) with options through 2020.
Kearny, which was already working with the Los Angeles County Airport Land Use Commission on issues related to airport-adjacent property such as noise contours and distances from runways, realized that any “through-the-fence” improvements at the Vought site, such as providing access to the airport, would add yet another layer of regulatory approvals with the Federal Aviation Administration. Though there are synergies at the Vought site because of its proximity to the airport and the potential exists to add aviation-related projects on the western end of the site, now called Century Business Center, Kearny has no specific plans for the site at this time.
One of the more complex issues for the new owners of the Vought site was the subdivision of a property zoned for heavy industrial use with one user. In addition to the complicated matter of subdividing utilities from one user to multiple tenants, the firm needed to file a new EIR. However, with no decision on what buildout would be and not wanting to delay the EIR process, Kearny contemplated a variety of scenarios—a purely industrial business park, light industrial space with retail uses, and industrial space with self-storage and recreational vehicle storage.
Though this approach doubled the cost of the EIR and added three months to the overall time frame, it gave Kearny time to evaluate a wide variety of uses and respond to shifts in the market. According to Kang, it has helped Kearny avoid many of the problems developers are currently going through in the fluctuating market.
Another problem involved deciding which buildings to keep and which to demolish. Some structures were functionally obsolete and slated to be torn down; others could be used, but were isolated in the middle of a three-acre (1.2-ha) parcel and were in the way of a site plan for new buildings. Of the 350,000 square feet (32,500 sq m) of building space that was demolished, one-third constituted an easy decision by the developers, Kang said. The market was instrumental in helping Kearny decide on the remaining structures, he said. All 785,000 square feet (73,000 sq m) of that space has been sold or leased to a variety of users, including a rocket manufacturer, a bath products company, and a Hollywood production company.
“We were pleasantly surprised by the users and buyers who were willing to pay us premium prices,” Kang says. “We have a wide and disparate variety of industrial users that have repopulated the space. Here in southern California, particularly the South Bay, which is one of the strongest industrial markets in the United States, we underappreciate the demand for industrial buildings that don’t have good truck loading [facilities], dock-high loading doors, and 24-foot [7.3-m] clear heights.”
To meet the demand for such buildings, construction was completed on 21 new structures ranging in size from 5,700 to 20,700 square feet (530 to 2,000 sq m).
“Hawthorne now has corporations using the airport, and homebuilders in the area are marketing to pilots,” Guidi says. “It’s not just about business, but residents as well. This was very important to the city since many homes built in the 1960s and 1970s front the airport and Century Business Center. The homeowners associations have totally embraced the revitalization from the beginning. There has been a spin-off to everything that has happened here in the past several years, and everyone has benefited.