'You're Going To Have To Beg Someone To Do This Work': Office-To-Residential Conversion Outlook Dim
Los Angeles, and especially Downtown, has a track record of success with adaptive reuse. But today's market lacks some crucial pieces that helped revitalize the central business district in the early 2000s.
Those missing pieces are among the factors preventing developers from converting the swaths of downtown office buildings that stand empty today.
“Most office buildings don't have the layouts and windows and systems that make it easy to make the conversion,” MJW Investments President Mark Weinstein said during Bisnow’s Los Angeles Office Conversions Summit at the Hilton Los Angeles Culver City. “Just because you have an empty office building doesn't mean it's right for conversion. I think it's really important to be disciplined in buying these buildings because you can really get yourself into a big mess.”
A major factor behind the success of conversions in the aughts was the Mills Act, which offered historic tax credits that translated into hefty property tax breaks and offset costs.
“The buildings we're looking at now lack that,” KFA Senior Associate Tarrah Beebe said. “The tax incentives need to catch up as well.”
Without more incentives, prices need to fall even further than they already have, to "pennies on the dollar," said Arthroto President Doug Hayden. Strategic Realty Holdings CEO Eddie Lorin and Weinstein both agreed that such a precipitous drop would be needed.
“Understand that there aren’t going to be 10 bidders [for these assets]. You're gonna have to beg someone, even if the economics work, to step up and do this work,” Lorin said.
Then there are the physical challenges to converting.
Changing the use of a building often involves unraveling the mystery of what is actually going on in the walls. Outdated plans and blueprints hide challenges that evade even 3D scans and can only be revealed after a sale has been closed and walls come down, panelists said.
Less hidden, but equally complicated, can be the remaining tenants in these buildings. There are few totally vacant offices in the city, panelists said. Rather, there are many offices with just enough tenants to pay bills. Those tenants complicate the conversion process as everything has to happen around them.
Often those tenants have spent a lot on their tenant improvements and don't want to leave their offices, Lowney Architecture Studio Director Janice Li said during the panel. So conversions have to work around them, creating a game of Tetris.
Despite the pessimistic outlook panelists had for conversion prospects, some had active projects or were exploring prospective reuse deals, and only one seemed to rule out the prospect of doing another one in the future.
“I'm not sure I want to do it again. I didn't have gray hair when I started doing it,” MJW’s Weinstein said. His firm was responsible for the giant Santee Village adaptive reuse project in the Fashion District but now mostly repurposes apartments as student housing and buys newer multifamily properties.
“If the building’s right and you can get it done right, it's great,” he said. “But if it ends up going in a different direction, the opportunity costs of what you spend your time on versus other investments you could be doing sometimes aren't worth it.”
