With Adaptive Reuse Options Limited, Developers Adapt

A new round of housing growth is coming chiefly from new construction, with projects such as the Jia Apartments (shown here) rising. The transformation of old buildings into condominiums and apartments, which powered Downtown’s residential boom a decade ago, has slowed.

DOWNTOWN LOS ANGELES - The adaptive reuse ordinance has been hailed as the policy lynchpin that enabled Downtown’s residential revitalization. Fourteen years after the landmark law passed, however, few local developers are making use of it, even as Downtown is in the early stages of a second housing boom.

While a few adaptive reuse conversions are in the pipeline, those projects are vastly outnumbered by plans for new buildings. Among housing projects currently being constructed, nearly all are ground-up developments, from wood-framed complexes such as Chinatown Gateway at Broadway and Cesar Chavez Avenue to steel-framed towers like Wood Partners’ South Park mid-rise at Eighth and Hope streets.

The paradigm shift toward new construction stems in part from a curious market reality in which it is simply too expensive to turn old buildings into housing, developers say. It’s to the point that it actually costs less to build on an empty plot.

Construction costs are significantly higher today and most of the buildings that were best suited for residential conversion have already been transformed. But perhaps the biggest strain on adaptive reuse growth is, ironically, the law’s own success. The residential surge and the flurry of restaurants and bars that accompanied it over the past 10 years have driven up the demand for housing. In the process, long depressed property values have surged, shrinking the potential profit margin for today’s developers.

In other words, it was easier to justify the high cost of renovating a historic building when it cost relatively little to buy it.

“Buildings that used to go for $3 million or $5 million are now $20 million,” said Old Bank District developer Tom Gilmore, who is widely credited as a pioneer of Downtown adaptive reuse. “It is fundamentally more expensive to do this now.”

As land values have soared by as much as 400% since the early 2000s, rents have only increased about 30%. Ten years ago, Historic Core rents averaged about $1.85 per square foot per month, Gilmore said. Now, even with residential occupancy in Downtown at about 98%, rates in the same neighborhood average approximately $2.35 per square foot. Rents are generally higher in the Financial District and South Park.

The latest wave in Downtown multifamily housing is being driven largely by institutional investors and private equity funds. This marks a change from the initial surge of Downtown housing, which was fueled by local developers such as Gilmore, Izek Shomof and Barry Shy.

Larger corporations generally eschew adaptive reuse-type projects because they are riskier, more time-consuming to permit and as a result, more expensive to build out.

The adaptive reuse ordinance, propelled by entities including the Central City Association, was created in the hopes that housing developers would take a chance on a moribund Downtown. The law allowed developers to bypass some modern building codes that, if enforced, would have made it practically impossible to convert historic structures. The law was passed by the city in 1999. Gilmore was the first person to try out the new proposal (though Ira Yellin had opened the Grand Central Square apartments a decade before), and after his trio of buildings near Fourth and Main streets filled up quickly, other developers followed.

Even with the streamlined code rules, adaptive reuse projects generally require specialized contractors with experience installing plumbing, electrical and mechanical infrastructure in old buildings — all elements that could lead to costly surprises during the build-out, said Shy.

A case in point is the Brockman Lofts. The 80-unit apartment building on Seventh Street opened last year, though work on a transformation originally began in 2005. The initial cost of about $16 million ultimately surged to nearly $40 million.

“New construction is easier than conversion,” said Shy, who after developing eight adaptive reuse projects in the Historic Core has his sights set on building a ground-up tower, SB Omega, at Sixth and Main streets. “When you do a conversion you really deal with some unknowns. With new construction you know up front all the elements, so you can do almost anything you want within your envelope.”

Low-Cost Models

The few adaptive reuse projects that are currently in the works are from local entities experienced with Downtown conversions.

Steve Needleman, who developed the Orpheum Lofts, is converting the Singer Sewing Machine building at 806 S. Broadway. Transforming the nine-story structure is expected to take about two years. Pacific Electric Lofts developer ICO Development is in the planning stage for a 55-unit conversion of 430 S. Broadway. Experienced Arts District developer Linear City is working on a transformation of 1111 Sunset Blvd., a former office building.

Whereas higher property values have limited opportunities for adaptive reuse, the pending projects pencil out because they start with a low cost basis. Needleman’s family has long owned the Singer Sewing Machine building. ICO paid $2.8 million last year for 430 S. Broadway. The deal was negotiated privately with the seller, who did not otherwise market the property for sale.

“We didn’t have to face market conditions that would have required underwriting to condo spec finishes,” said Joseph Soleiman, director of acquisitions at ICO.

Other landlords, however, are demanding more for their historic buildings. Whereas ICO paid $55 per square foot, a six-story structure at 730 S. Los Angeles St. known as the Grether & Grether Building, already entitled for a conversion, is listed at $8.6 million, or $96 per square foot. The Commercial Exchange Building at Eighth and Olive streets is listed at $13.9 million, or $116 per square foot.

In order to facilitate more conversions, Soleiman said the adaptive reuse ordinance may have to evolve. For one, a change to the law’s minimum unit size could make projects easier to finance.

Currently, units in adaptive reuse projects must average 750 square feet. Smaller residences are attractive to developers because they command higher rental rates per square foot, said Soleiman, who added that Downtown’s popularity among young, single people makes it particularly amenable to smaller footprints. Developer Allen Gross recently won approval for a minimum size reduction in his proposed conversion of the Banco Popular building at Fourth and Spring streets, though the ruling is limited to that project.

The ordinance’s future could otherwise be defined not by housing developers, but hoteliers, said Gilmore, who believes that the under-construction Ace Hotel at Ninth Street and Broadway could preface more boutique lodging projects taking over aged edifices.

Adaptive reuse efforts are more likely to pencil out for hotel developers because hotels generate more revenue. Buildings with layouts that would be problematic for residential use might also work better for hotels, Gilmore said.

A host of Broadway buildings with empty upper floors might seem like logical residential conversion targets, but few of them are amenable to housing because they are sandwiched between structures that block natural light to many of the rooms. In theory, developers could cut light wells into those buildings, but the cost would be prohibitive, Soleiman said.

If the upper floors of those Broadway buildings are ever converted, Soleiman said they’d be better suited for creative office space, which requires less natural light. Such conversions, however, would not be governed by the adaptive reuse policy because they would not technically constitute a change of use.

Fourteenth District City Councilman José Huizar has broached the idea of a new ordinance similar to adaptive reuse to facilitate creative office projects, but no formal proposal is on the table.

Contact Ryan Vaillancourt at ryan@downtownnews.com.

©Los Angeles Downtown News.