INVESTORS AGGRESSIVELY BUY OLD OFFICE BUILDINGS FOR LOFT CONVERSIONS

The fledgling efforts to convert old, boarded-up downtown office buildings into snazzy residential lofts have suddenly caught fire, with new investors rushing in to undertake the risky conversions. No fewer than six office buildings in the downtown historic core are currently in escrow to buyers with conversion projects planned. The sudden burst of investment comes just two months after a survey commissioned by the L.A. Conservancy found that 50 buildings in the historic core most of them empty might be feasibly converted to residential. “That’s good progress it’s only been (two) months,” said Ken Bernstein, director of preservation issues for the conservancy. “The activity, I think everybody would agree, is at a very active pace at the moment.”

The activity involves the following deals:

– Urban Pacific Real Estate Group LLC of Long Beach is in escrow to buy four historic downtown office buildings, as well as a fifth structure in downtown Long Beach, with plans to have the first conversion done by the end of 2001.

– Dromy Investment Corp., in its first investment outside the Westside, expects to close escrow this week on the five-story building at 626 S. Spring St., with plans to convert it into 35 loft units.

– Tom Gilmore of Gilmore Associates, who took some of the first steps into downtown office-to-loft conversions with the 250-unit Old Bank District project, is set to close escrow in December on another building and an adjacent lot suitable for parking.

Bernstein of the conservancy said there are other properties on Spring Street where conversion plans are in the works, but he declined to give more details. Not all of the action is coming from newcomers to downtown. For example, Izek Shomof, a principal at Spring Towers LLC and owner of the 120-unit Premier Tower, is near completion on a conversion of 639 Spring St. into 36 live-work lofts. “The area is changing,” Shomof said. “There is no reason for it not to. It has beautiful buildings.” Maybe so, but that doesn’t mean the projects will succeed financially. Such investments are still considered extremely risky by conventional standards. “It does make me nervous,” conceded Ely Dromy, principal of Dromy Investment, when asked about his imminent acquisition, his first outside the Westside. “But the rent you’re getting there (in downtown) is more expensive (per square foot) than the rent you’re getting in Westwood.” Combined, the two newcomers Dromy and Urban Pacific could add another 600 or more apartments and for-sale condominiums to the downtown area. That represents a big increase in the housing stock downtown, where L.A. Conservancy officials estimate there are now fewer than 1,000 residents. The dynamics of the local housing market do appear to be changing. The conversion activity comes at a time when economists are forecasting that the demand for housing will soon outstrip supply in L.A. That situation, combined with ever-more-congested roadways, could force people to turn to the downtown area to find housing close to where they work. Urban Pacific partners Mark Tolley and Scott Choppin acknowledged the risks involved in buying 80-year-old buildings that require seismic retrofitting and asbestos and lead-paint removal. “The cost to rehabilitate these buildings is a huge question mark,” Tolley said. “The thought among developers is that you’ll never know what you’ll get into. We’re trying to use the groups that know how to do it.” For example, Urban Pacific has turned for help to Killefer Flammang Purtill Architects, the firm that handled Gilmore’s Old Bank District project and conducted the conservancy study. Even at G.H. Palmer Associates, which saw the first phase of its Medici apartment project lease up rapidly, Geoff Palmer is talking conservatively about downtown housing. “We’re going to go cautiously, building by building,” Palmer said. Still, Tolley and Choppin see momentum downtown in conversion work and on the new construction front. The partners credited much of the activity to a city ordinance approved last year that stripped away many requirements for redeveloping downtown buildings built before July 1, 1974. Chiefly, parking requirements were nixed entirely and the city allowed more flexibility for size and layout of living spaces. “(The new ordinance) probably cuts the cost by 20 percent,” said architect Wade Killefer, a principal at Killefer Flammang. Andrew Adelman, general manager of the city’s Department of Building & Safety, said the ordinance is among many changes in the review process that has city staffers looking at the “spirit” of fire and safety regulations, rather than holding 80-year-old buildings to standards that are impossible to meet because codes were updated to apply to brand-new product. “The changes in the code help, but what’s driving the product is the need for housing and the (nationwide) interest in downtowns,” said Ed Rosenthal, a historic properties specialist for Grubb & Ellis Co. But that doesn’t mean there’s going to be a flood of housing conversions, Rosenthal said. “There’s a lot of interest and not that much property available,” Rosenthal said. “It’s not easy to make transactions. Not everything’s for sale, and some of it is unreasonably priced.” Ironically, Bernstein said, a potential barrier to housing in downtown is another conversion trend that finds telecommunications companies buying up old office buildings to house their switching equipment. In recent months, telecom firms have snapped up buildings including one identified in the recent survey, that might have gone to housing instead. As a result, the L.A. Conservancy is pushing for some kind of city ordinance that would give planners jurisdiction to review the handful of situations where both telecom and housing conversions are feasible. “There are a number of deals on Spring Street and Broadway for residential that have been scuttled by telecom companies, either directly in that telecom companies have outbid residential developers, or indirectly when historic core property owners have been holding out for the elusive lure of potential telecom,” Bernstein said. “It has made residential development very difficult in a time when we have seen this explosion of interest.”