Adaptive Reuse and Development

The Adaptive Reuse Ordinance passed by the Los Angeles City Council in 1999 has been the keystone of development in Downtown Los Angeles. However, after fourteen years, few local developers are making use it, despite the fact that the area is experiencing a second housing boom. There are a few adaptive reuse projects in the works but they are outnumbered by proposed projects for new buildings such as the Chinatown Gateway at Broadway and Cesar Chavez Avenue and a mid-rise tower at Eighth and Hope Streets. Why is this? From a dollars and sense point of view taking an existing building and rehabilitating it can be often more cost effective than new construction. After all, in historic preservation there is a common saying "The greenest building is the one already built." The shift towards new construction stems from an odd market reality where it is simply too expensive to rehabilitate an older building, at least that's what developers are saying. It seems that it's more cost effective to build from scratch. The hard truth is that construction costs are significantly higher and most of the buildings suitable for residential conversion have already undergone the process. The biggest strain on adaptive reuse growth is the success of the law itself. Success can be a heavy weight to bear. Translated, this means the flurry of new residential and commercial space has driven up demand for housing. In the process, long depressed property values have shot up, shrinking the profit for developers. In short, in the past it was easier to justify the high cost of rehabilitating a historic building when it was less expensive to buy. Since the early 2000s land values in the Downtown area have gone up by 400% while rents have only increased by 30%. I know this sounds odd, rents have only gone by 30%. According to Tom Gilmore, the developer of the Old Bank District and widely credited with pioneering adaptive reuse in Downtown, buildings that once cost $3-5 million now go for $20 million. Thus, its more expensive to make use of the ordinance now. Back to the rent to property value dichotomy. Ten years ago, rents in the Historic Core (a wonderful place to wander around), averaged about $1.85 per square foot per month. Now, with residential occupancy at about 98%, rates in the same neighborhood average approximately $2.35 per square foot, with slightly higher numbers in the Financial District and South Park. The current trend in multifamily housing is mainly being driven by institutional investors and private equity funds. This is a change from when housing was funded by local developers such as Gilmore, Izek Shomof and Barry Shy. Larger corporations prefer the less risky new construction approach to adaptive reuse because they less time-consuming to permit and as a result, more expensive to build. The ordinance, pushed by entities such as the Central City Association, was created with the idea that housing developers would take a chance in the dormant Downtown area. It allowed developers to bypass existing codes, as enforced, which would have made it virtually impossible to convert historic buildings. When the law was passed in 1999, Gilmore was the first person to try it out and a trio of buildings followed quickly. However, it should be noted that Ira Yellin opened Grand Central Square apartments ten years before. Even with a more streamlined code rules, adaptive reuse require specialized contractors who are skilled at installing plumbing, electrical, and mechanical systems in older buildings-all of which can lead to sometimes unpleasant surprises during construction. One example is the Brockman Lofts on Seventh Street, opened last year. The conversion process began in 2005 with an initial cost of about $16 million and almost tripled to $40 million. With new construction, there are no surprises, only known elements. So what is the future of the Adaptive Reuse Ordinance? According to Joseph Soleiman, the law will have to change. One suggestion is a change in the law's minimum unit size from an average 750 square feet to smaller. Soleiman contends that smaller residences are more attractive to developers because they command higher rental rates per square feet. This is particularly attractive among the young single people and easier to finance construction. The future of the ordinance may lay in hotel development because of the higher revenue generated. Buildings with difficult layouts for residential use may work better for hotels, according to Gilmore. Also, a number buildings with empty upper floors appear to be another possible target for conversion because they are sandwiched between structures that block natural light to many of the rooms. According to Soleiman, this would be better suited for creative office space. Technically, this would not be governed by the ordinance because it does not constitute a change of room use. Downtown area City Councilman Jose Huizar as proposed a new ordinance similar to adaptive reuse that would facilitate creative office space projects but nothing formal yet. www.ladowntownnews.com/news/with-adaptive-reuse-options-limited-developers-adapt/article_268d0cca-6748-11e2-a8b4-001a4bcf887a.html