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Thursday, Aug 11, 2022

SPECIAL REPORT: Flipped Switch

In the heyday of corporate construction a half-century ago, U.S. Borax Inc. opened its headquarters in a nine-story concrete tower in what is now Koreatown. Today, what was once a monument to industry is an apartment building.

The conversion of the building, at 3075 Wilshire Blvd., was among the first in a new wave of projects that are transforming aging offices into upscale residences, capitalizing on L.A.’s demand for housing.

“The markets for renting in L.A. have gone up like crazy in the last few years,” said Garrett Lee, president of Jamison Services Inc. in Koreatown, which did the 3075 Wilshire project in 2013. “It finally made financial sense from a profitability standpoint to invest in apartments, whereas 10 years ago, it never did.”

The Borax property, now a 100-unit apartment building called the Westmore, offers a fitness center, a lounge with a pool table, and views of the Hollywood sign. Rents command between $2.40 to $2.66 a square foot – higher than the $2 a foot it used to bring in as a bare-bones office.

The conversion was so successful that Jamison is now tackling nine others in Koreatown – and it’s not alone. Other developers have taken on similar projects in West Hollywood, Mid-Wilshire, Echo Park, and Long Beach.

“We have a severe unit shortage. In that context, it’s a pretty safe bet to build housing,” said Raphael Bostic, interim director of USC’s Lusk Center for Real Estate. “If you can get a big building and get a lot of units, that puts you in a good position for a nice return.”

The conversions come as commercial hubs that were once dead after dark are attracting residents with hip restaurants, coffee shops, and nightlife, mirroring the renaissance that has taken place in downtown Los Angeles over the past decade.

“It’s been successful downtown, and now we’re seeing it spread to other parts of the city,” said Tyson Sayles, a principal at Long Beach-based Ensemble Real Estate Investments.

Downtown kickoff

The experience downtown proved there is value in turning decades-old offices into housing. Aided by L.A.’s Adaptive Reuse Ordinance in 1999, developers could spruce up downtown’s aging, empty buildings without typical zoning and code restrictions that would have made conversions impractical, if not impossible. Especially appealing to developers was the opportunity to offer more units per lot size than would be allowed in new structures.

Developer Tom Gilmore seized on the ordinance to transform a number of early 20th century banks and offices into lofts with historic character. His success paved the way for more conversions, and downtown now has more than three times the number of housing units it had in 1999, according to the Downtown Business Improvement District.

The city expanded the adaptive reuse ordinance to parts of Hollywood, Koreatown, Chinatown, and Lincoln Heights in 2003. Its Office of Historic Resources now lists 10,000 units either completed or under development. Long Beach just adopted an adaptive reuse ordinance of its own, intended to boost its once-neglected downtown area.

Those ordinances are coming in handy now as Los Angeles grapples with enormous housing demand. The multifamily vacancy rate is at about 4 percent, according to the Casden Real Estate Economics Forecast’s 2016 Multifamily Report, issued last week by the Lusk Center for Real Estate. The average monthly rent across Los Angeles County was $1,307 a month in 2015, a 4.8 percent increase over a year earlier. That’s got developers looking at outdated office buildings and doing the math.

“If you’ve got one level of return for office, and another level of return for housing that’s getting higher as we speak, moment to moment, at some point, the lines cross,” said Bostic. “What once made sense as an office now makes sense as a multifamily.”

Even as the apartment market is hovering at near capacity, the market for office space has been limping forward. The county office vacancy rate tightened to 15.1 percent in the first quarter, according to Jones Lang LaSalle. That’s a significant dip from the prior quarter’s 15.5 percent, and a further drop from the 16.1 percent in the first quarter of last year.

Taking even a dozen buildings out of the office pool and converting them to residential use can help both markets.

While such conversions are not without their obstacles (see page 28), they can be less expensive than ground-up developments.

Joe Wathen, chief executive of Koreatown-based Wilshire Construction, has tackled a half-dozen conversion projects, including 1100 Wilshire, just west of downtown Los Angeles – a 37-story office that was vacant for two decades before becoming condos in 2006.

What has been the biggest challenge in these conversions?

Layers of unknowns can force you to change your approach more frequently than with (ground-up) projects. Your drawings, schedule, and budget must then be modified to accommodate those surprises.

What has been easier than you expected?

Finding buildings that make good candidates for conversion.

What particular project are you most proud of?

1100 Wilshire was a large, complex undertaking with building systems that did not measure up to our expectations, creating constant challenges to keep moving forward. The amenity deck was re-created from the bones of what existed at the 17th level. The schedule was challenging, but the end product was a success.

Would you take on more conversions?

Absolutely. In the end, your team’s efforts breathe new life into an older building. It can be a cost-effective form of redevelopment without the neighborhood construction impacts of a new, ground-up project.

Karin Liljegren, founder of downtown L.A.-based architecture and interior design firm Omgivning, has worked on about two dozen conversion projects, including Jamison Services’ Westmore, and was recently tapped for CIM’s renovation of the Farmers Insurance building.

What has been the biggest challenge in these conversions?

Offices typically have many layers of tenant improvements from decades of companies moving in and out or renovating within. With layers of drywall and carved-up spaces, it’s difficult to see what surprises lie underneath.

What has been easier than you expected?

It’s our job to take the corporate out of the building and make it feel like home. This might seem like a challenge, but most older offices have grand lobbies, elaborate detailing, and high-quality finishes. These unique features can no longer be replicated in most new multifamily construction.

What project are you most proud of?

The Broadway Loft building had been empty for about 40 years and was in dire shape. It was a smaller and indistinguishable building among the many ornate, large, or architecturally significant buildings in downtown’s Historic Core. The owner asked us to put bridges in the old, nasty light courts and to make them entries to the units. The adaptation became a beacon of the building.

Would you take on more conversions?

There is nothing more rewarding than seeing a building in disrepair that looks like a horror movie (and many were filmed there), and then bringing new life and energy to make people proud to call it home.

First flip

Jamison’s decision to do its first flip came after the recession, when many of its Class B offices in Koreatown, leased to small businesses and county agencies, experienced as much as 60 percent vacancy. Jamison picked the Wilshire site, which it already owned, for practical reasons. As a concrete building, it would eventually need a major seismic retrofit. Plus, it was 25 percent vacant.

Next came interior demolition, structural upgrades, and final renovations. The units have 12- to 14-foot-tall ceilings of unfinished concrete and retain the unusually shaped arched windows that were a remnant of its past life.

“People really respond well to that – or the type of people who want to live in a building like this,” said Lee, adding that the company focused on attracting young professionals keen on Koreatown’s urban vibe.

Jamison’s projects under construction include two sites on Wilshire and one on nearby Sixth Street, with six more sites in Koreatown in the planning stages. By Lee’s calculations, per-unit construction costs for an adaptive reuse run from $100,000 to $150,000, compared with $200,000 for ground-up projects.

One of Jamison’s rehabs, on a site near the former Ambassador Hotel, will boast amenities including a rooftop pool deck as the property owner aims to be competitive with new developments sprouting up in Koreatown. The plan is to seek rents between $3 and $3.25 a square foot, but to stay below luxury rates that hover above $4 a square foot in the submarket.

Other developers are counting on just that luxury. In West Hollywood, Tyler Siegel and John Irwin of Townscape Partners, backed by New York’s Angelo Gordon & Co., nabbed the 60-year-old office building at 8899 Beverly Blvd. in 2012 for $39 million. The partners plan to convert it into 48 condos and 15 affordable apartments.

The process will involve demolishing the interior down to the concrete stubs and expanding on three sides. Townscape will also add eight or nine homes on the adjoining parking lot.

Because West Hollywood does not have an adaptive reuse ordinance, the pair meticulously worked through hundreds of code requirements, including a mandate that they install a helipad. They also contended with opposition from community members concerned that the affordable units, grouped separately from the condos, would be only accessible through an independent entrance. They dubbed it a “poor door” after a similar controversy in New York. But the developers said they had always planned for all residents to share entrances and amenities.

“It was a manufactured controversy,” Irwin said.

The building, constructed as a design center for furniture manufacturers, features bathtublike balconies with clear railings that were meant to show off product.

But the developers especially prize the building’s height. The structure soars 120 feet tall in a part of the city that now limits new buildings to just 35 feet. That means residents will have sweeping, unblocked views – a West Hollywood rarity that should command top dollar.

The developers said they could not yet discuss the projected prices for the condos, which will range from 800 to 6,300 square feet. But high-end condos nearby, such as those at Sierra Towers, have recently been on the market at $2.5 million – more than $2,000 a square foot – for a one-bedroom unit. Condos in West Hollywood sold for an average of $660 a square foot in the first quarter.

“The trend of people wanting to live in dense cities is really where the future is,” said Siegel. “Around the city there are unpolished gems, that if converted, can really benefit a community.”

Original architecture

Location has also been a big factor for Mid-Wilshire developer CIM Group in selecting buildings to convert into residences. Its latest project is the Farmers Insurance building in Mid-Wilshire, which it bought in 2014 after the insurance firm decided to relocate to Woodland Hills. CIM plans to build 50 condos on the top five floors of the eight-story building while retaining offices on the lower levels. The project would be its sixth adaptive reuse in Los Angeles since the early 2000s. In this case, the art deco building – constructed in 1937 – appeared ideal for residential use due to its location near affluent Hancock Park homes.

“You start thinking, maybe some of these homeowners, they love the neighborhood, but they don’t have the right project to move to when they are starting to think about downsizing from those mansions,” said Shaul Kuba, CIM’s co-founder and principal. The Farmers building boasts plenty of natural light and sweeping views, in addition to the beautiful architecture, making it an ideal acquisition.

“We’re constantly seeking to find those buildings,” Kuba added. “When we find them, we’re all over it.”

Yuval Bar-Zemer had already converted warehouses in downtown’s Industrial District into residences when he came across the former Metropolitan Water District building in Echo Park in 2011. It had been neglected for 20 years when a condo developer went into bankruptcy, giving Bar-Zemer an attractive price of $6.8 million without the hassle of pushing out existing tenants – allowing him to invest a reported $15 million in creating luxury apartments.

Bar-Zemer was also drawn by the early ’70s modernist design features from architect William Pereira, who also designed Los Angeles International Airport’s Theme Building and the original Los Angeles County Museum of Art campus.

“The original architecture is so good, and so smart, and so impressive, it’s actually very easy to work within those parameters that he set,” said Bar-Zemer.

He completed the project, dubbed the Elysian, in 2014, and it has been fully leased at rents ranging from $5.76 to $6.50 a square foot, according to real estate data provider CoStar Group Inc.

Bar-Zemer is now scouting for his next project, and aiming to gauge how next generations will live their lives and conduct their businesses.

“There are fewer people that say, I’m going to my 8-to-5 job in an office,” he said. “The market is going to blend the lines between residential and commercial.”


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