Downtown office buildings have been converted into everything from telecom-equipment storehouses to residential lofts. So the latest scheme to breathe new life into the outdated structures converting them into hotels may come as no surprise.

But is it financially feasible?

Thanks to a dearth of downtown hotel rooms and steady rise in occupancy, the answer is a qualified yes, industry observers said last week.

With downtown’s hotel occupancy rate projected to average 71 percent this year, according to PKF Consulting, market conditions appear strong enough to support the conversions.

Columbia Development of Manhattan Beach is already in the process of doing just that, with more than 700 new hotel rooms on the drawing board for downtown. It’s now in escrow for the 13-story Sanwa Bank building at Flower Street and Wilshire Boulevard, and it closed escrow on the Bank of California building at Flower and Sixth streets in March.

Columbia partner Mark Neumann declined to talk about the projects until they are further along, but did say: “There are a number of positives to what we’re doing.”

With the downtown office market so anemic, investors believe they can get a better return by pumping money into conversions rather than office renovations, said Alan Ray, president of Costa Mesa-based Atlas Hospitality Group.

“I think we’re undoubtedly going to see (hotel conversions) happen more in downtown Los Angeles, where the vacancy rate for the downtown office market is still relatively high,” Ray said. “To retrofit them for office use doesn’t make sense because you can’t get the rents to cover the cost.”

Conversions have popped up in a number of other nationwide cities. In San Diego, developer Sage Hospitality Resources spent $24 million to convert the historic, 15-story San Diego Trust & Savings building into a successful 247-room Courtyard by Marriott that opened in 1999.

“There have been some great conversions like in San Diego but the caveat is, you’ve got to find an interesting building in the right location where there’s a market opportunity,” said Bruce Baltin, senior vice president at PKF Consulting.

Investors have actually been poking through vacant downtown office space for several years in search of good hotel prospects, he said.

Accommodating travelers

Once converted, the Bank of California building in downtown L.A. would be run as a boutique hotel catering to young business-types and managed by Andre Balazs’s Standard Holdings, which opened the Standard hotel in 1999 in West Hollywood after converting it from senior housing.

Though the Bank of California building is being packaged as a boutique hotel, both new hotels being proposed by Columbia Development would be positioned to compete directly with other downtown hotels for business travelers and tourists, Baltin said.

Their success will depend not only on the thriving L.A. Convention Center but also on coming attractions such as the Disney Concert Hall and the new Cathedral of Our Lady of the Angels.

“A boutique hotel is still geared to commercial travelers and convention attendees,” Baltin said. “You’re hoping that as you get new supply on the market, the market will absorb it. I’m sure over time it will. It’s just a question of how long.”

Faster, cheaper

Baltin pointed out that conversion projects can be brought on line faster than from-scratch hotels.

And the existing character of some old office buildings can add to the appeal for guests. Take for example the former Bank of California building.

“It’s a gorgeous building,” Baltin said. “It’s got a lot of marble and detail in it you wouldn’t get today, certainly not for the cost.”

But there’s a big catch. Most office buildings don’t have the window layout or internal structure a hotel needs. So lots of downtown space isn’t an option for hotel developers.

Baltin points to Hollywood as another area where the market conditions are right for such office-to-hotel conversions, though none have been announced yet.

“The market in Hollywood is getting better and will continue to get better with the Trizec-Hahn project,” he said. “And there’s a lot of interesting buildings, so it wouldn’t surprise me if somebody does.”