How the Influx of Tech Companies is Helping Revitalize Downtown L.A.

Above: Portal A offices, one of the many tech startups that’s moved to downtown L.A.

“For decades, Downtown has been the dark center of L.A.: a wasteland of half-empty office buildings and fully empty streets,” writes journalist Brett Martin. “But amid the glittering towers and crumbly Art Deco facades, a new generation … [is] creating a neighborhood as electrifying and gritty as New York in the ‘70s.”

Indeed, downtown Los Angeles is making a comeback. It’s happened quickly, but certainly not overnight. The city’s transformation began in 1999, when the City Council adopted an adaptive reuse ordinance that made it easier for private developers to invest in and rehabilitate deteriorating buildings. Since then, more than 700 businesses have moved downtown. Residential development has exploded, and the downtown population has swelled from an estimated 19,000 in 1999 to 58,000 by 2014.

Much of this growth can be attributed to the $4.2 billion Los Angeles Sports and Entertainment District development (commonly known as “L.A. Live”). The massive mixed-use project required upwards of $150 million in public subsidies, but only after the developer agreed to sign the “Staples Center CBA,” one of the most progressive community benefits agreements ever created, and one that involved negotiations with a coalition of 30+ stakeholder groups. The massive complex has generated a constant flow of downtown foot traffic, and people travel from far and wide to go to world-class shows, performances and sporting events at the Staples Center and Nokia Theater, which anchor L.A. Live.

But it’s not just the tourism and entertainment industries that are reaping the benefit of L.A. Live and downtown’s resurgence. There’s suddenly a burgeoning tech scene, too.

Twenty years ago, most tech entrepreneurs would scoff at the notion of locating east of the 405. “Now, they’re not just venturing beyond that once-unthinkable border, they’re taking their companies with them,” writes Andrea Chang for the LA Times. “Like many Angelenos, they’ve become charmed by the new, revitalized downtown.”

As the area around L.A. Live is redeveloped, tech entrepreneurs are pushing eastward toward the Arts District – an area that is still plagued by commercial vacancies and high crime, but an area that offers affordable rent and boatloads of charm.

By some estimates, there are more than 78 tech-oriented firms now located in downtown Los Angeles, or as the trendsetters call it, “DTLA”. During the industry’s early years, many of the tech companies skewed toward e-commerce given the proximity to L.A.’s fashion district and the abundance of warehousing space and manufacturing facilities. Figs (trendy medical scrubs), Milk & Honey (customized shoes) and Poprageous (leggings) are just a few of the many e-commerce companies located nearby.

With the city’s reputation for movies, entertainment and fashion people tend to forget about the strength of the local manufacturing industry, explains Jamie Kantrowitz, managing director at Mesa Global Digital Media. “We’re a great place to build e-commerce companies because we have the largest manufacturing business in America.”

As downtown’s tech scene grows, it’s evolving beyond e-commerce. Mobile app, hardware and digital media companies are popping up left and right. Just last fall, Portal A, a digital content studio best known for creating the annual YouTube Rewind video, began to outgrow its 2,000 square foot offices in the Los Angeles Times building. When confronted with the decision to stay downtown or move to a digital media hub in the suburbs, Portal A doubled down on DTLA and locked up a 4,000 square foot space just a few blocks away at the 600 Wilshire building.

“It feels like you’re in a real city, not in a Hollywood or Silicon Beach bubble,” says Portal A co-founder and managing partner Zach Blume. “You look out of the windows and it’s like you’re watching a scene from ‘Chinatown’ or some other movie like that. There’s such a hubbub of activity. It just feels vibrant and thriving, which is not something you could say about L.A. downtown 10 years ago.”

Co-working locations, business incubators and accelerators have also sprung up in the area and are feeding the entrepreneurial ecosystem. LACI, the Los Angeles Cleantech Incubator, is one such example. LACI opened downtown in 2011 and has become one of the largest cleantech incubators in the world. Companies like 360 Power Group (advanced generators), Envi (waterless car detailing), GOmeter (smart meters for home water systems) and Hive Lighting (energy efficient plasma lighting) have all gotten their start at LACI.

Locating downtown isn’t just the trendy thing to do. It also serves a real business purpose. According to Cushman & Wakefield, downtown office rents average $3.04/SF compared to $4.32/SF in Santa Monica or $15.00/SF in Venice to the south. Flex space often rents for as low as $1.30/SF in downtown L.A.

And then there’s the ability to draw a more diverse, talented workforce.

“There’s definitely tons going on: lots of new start-ups and co-working spaces and nightlife and restaurants opening all the time,” says 29-year old Kai Powell, a developer who moved downtown after accepting a job with NationBuilder in 2012. “For people who are excited by that kind of thing, I don’t think there’s any other place.”

Despite DTLA’s buzz, there haven’t been many tech giants to move downtown just yet. Facebook and YouTube both have offices in Playa Vista; Snapchat and Google have offices in Venice. At one point, Yahoo toured office spaces downtown, but it, too, ultimately settled on Playa Vista.

If downtown L.A. continues its upward swing, it’s only a matter of time before one of these behemoths makes the leap back to the urban core. “Big fish chase the little fish,” industry experts say – meaning that corporate giants often move to where the smaller startup companies are in order to draw on their innovation, R&D and talent.

The influx of tech companies to downtown L.A. will have a tremendous impact on local real estate. Just look at what’s happened in San Francisco. That’s why excitement over downtown’s revival needs to be balanced with a close eye toward the anti-displacement of longtime residents.

One strategy is to pursue CBAs like the city did with the development of the Los Angeles Sports and Entertainment District. But real estate developers can only contribute so much before the numbers on a deal crumble under the weight of trying to prevent displacement alone.

Another strategy is to engage the tech companies directly. As tech tenants begin moving downtown, there’s an opportunity to negotiate a fuller package of community benefits.

This is a strategy that San Francisco has employed. The city offers a lucrative payroll tax exemption to companies willing to open in neighborhoods like Central Market and the Tenderloin—low-income areas that are ripe for transformation but at high risk for gentrification. In exchange for the tax break, the companies must agree to participate in the city’s First Source hiring program, which connects residents to entry-level jobs. If the tax exemption totals more than $1 million, the company must also agree to a separate CBA that providers a wider array of community benefits, such as job training and services for those who are homeless.

But as San Francisco has realized, gentrification is complicated. There’s no one cause, and certainly no one solution. It’s not a problem that can be solved through a new mobile app or high-tech solution. Yet as DTLA’s tech cluster continues to grow, and as the local real estate market bounces back in kind, the city has an opportunity to leverage the industry to deliver benefits to the entire community as a whole.