The recent Southern California Development Fund (SCDF) panel discussion with Garrett Lee of Jamison Properties, Anthony Muhlstein of Newmark, and Harold Wang of Palisades Investment Management, moderated by Michael Bohn, AIA, of Studio One Eleven, shed light on the current landscape of office conversions and adaptive reuse projects. Held at the Biltmore Hotel in DTLA, the May event provided valuable insights into the complexities and promises of this niche in real estate development.

Here’s a closer look at what’s being built and how these projects pencil out financially.

• ·         The Adaptive Reuse Landscape

President of Jamison Properties, Garrett Lee highlighted his firm's focus on adaptive reuse projects in Koreatown, Los Angeles. "We transitioned from a commercial real estate office to multifamily development about ten years ago," Lee said. "Post-COVID, we are fully engaged in adaptive reuse projects." Jamison is converting old office buildings into residential units to revitalize neighborhoods and address housing shortages.

• ·         Financial Viability and Market Trends

Anthony Muhlstein, from Newmark's West Coast Capital Market multifamily team, provided a financial perspective, noting, "We're definitely seeing a lot of interest in office-to-housing conversions because we've been selling a lot of them. However, developers face challenges with execution and the cost of capital." Muhlstein explained that office vacancies are high in areas like Playa Vista and Hollywood, making conversions attractive despite financing difficulties. He added, "The pricing seems to top out between $100 and $150 per square foot, with construction costs around $350 per square foot, leading to financing needs of 8-9%."

Lee also discussed the mandatory retrofits required for Jamison's pre-1978 buildings due to local ordinances. Since these updates are necessary, it makes financial sense to change the use of the buildings simultaneously, enhancing the economic viability of the projects.

• ·         Characteristics of Convertible Buildings

The panelists agreed that certain features make office buildings more suitable for conversion. Harold Wang, one of Palisades' founding partners, emphasized the importance of the building's structure: "You need a rectangle floor plate, smaller plates are better, and the floor-to-ceiling height is crucial." Wang also noted that cities with existing adaptive reuse ordinances make the process smoother. "If the city has an ordinance already, that makes things much easier," he said.

Lee echoed these sentiments, adding, "We look for urban core markets with a lot of amenities and walkability. Our aim is to create a mixed-use balance of work, play, and residence to foster 24/7 communities."

Benefits and Challenges

Adaptive reuse projects often offer financial benefits over new constructions. Lee pointed out, "Construction costs have increased 20-30% in recent years, and interest rates have doubled, making ground-up projects hard to pencil out. Adaptive reuse can offer savings in hard costs, making financing more attainable." Muhlstein added, "If you're converting a building at $325 to $375 per square foot, compared to $700 to $800 for new high-rise constructions, you're looking at significant savings."

However, the process is not without its challenges. Wang shared his experience, "City approvals have taken longer than anticipated. Recent policy changes have added to these delays." Lee also mentioned unexpected hurdles, such as mandatory retrofitting for older buildings, which can complicate projects but also offer opportunities to improve safety and sustainability.

Case Studies and Success Stories

The panelists shared examples of successful projects to illustrate their points. Wang highlighted a project in Long Beach, where an old GTE building was converted into 106 housing units with additional townhouse penthouses. "We removed the original rooftop equipment and utilized the space to add value," he explained.

Lee discussed a project in Koreatown, where converting 50% of an office portfolio to residential units created a vibrant mixed-use community. "This strategy also helps fill vacancies in remaining office buildings, creating a more occupied and lively environment," he noted.

The Future Outlook

As adaptive reuse ordinances evolve, the potential for these projects grows. "The upcoming adaptive reuse 2.0 ordinance in Los Angeles is exciting," said Lee. "It will expand opportunities citywide, allowing for more flexibility and creativity in converting buildings."

In conclusion, office-to-residential conversions present a viable and increasingly popular solution to the dual challenges of office vacancies and housing shortages. With careful planning and execution, these projects can offer financial benefits and contribute to urban revitalization. As Muhlstein summed up, "People need products, they have to develop. So we're busy."

This panel discussion highlighted that while the road to adaptive reuse can be complex and filled with challenges, the rewards make it a path worth pursuing.