Glut Busting : Empty Office Buildings Are Being Converted

The nationwide slump in commercial real estate is reviving developer interest in an old but challenging option for getting rid of costly, unwanted buildings: converting them to apartments, stores and other uses for which there is greater demand.

From California to Florida, imaginative developers are transforming the underutilized hulks of today’s dismal commercial real estate market into opportunities: An abandoned tire factory outside Los Angeles has been transformed into a shopping center; a former San Diego silk factory has been converted into 29 condominiums; a Tallahassee, Fla., developer brought state government offices to a shopping mall to fill half-empty retail space, and an ailing Denver shopping center has been revived as a church.

The work is often costly and wrought with tricky problems, and without low-cost government financing, some of the projects would be unfeasible. But interest in conversions is increasing.

“It’s become a big growth area,” said Michael Sumichrast, publisher of the newsletter Real Estate Data Report in suburban Washington.

While new construction peaked in the late 1980s, commercial renovation work--which includes both remodeling and conversions--has jumped more than $5 billion since 1985 to an average of $26 billion over the last three years, according to Real Estate Data Report.

There is a lack of enthusiasm for conversions, however, among builders and architects who cut their teeth erecting gleaming structures from the ground up during the 1980s. They say office buildings, some of commercial real estate’s biggest white elephants, often are unsuitable for alternative uses.

Most office buildings aren’t engineered to support the weight required for industrial or warehouse use. Others have interior space too far from windows or have heating, plumbing and air conditioning systems that aren’t easily adaptable to residential use. What’s more, removing asbestos from older buildings is a costly and dangerous undertaking.

“With the way the environmental and building code regulations are today, it becomes very expensive to undertake a conversion,” said Steve Kuptz, chief financial officer of San Diego-based developer Odmark Thelan. “It’s traditionally been more cost-effective to tear the building down and start all over again. But with (real estate) prices coming down, there may be some situations that might go against the norm.”

In an effort to broaden industry thinking, the Los Angeles Community Redevelopment Agency recently met with building owners to talk about converting old office buildings on downtown Spring Street. The conversion message was also preached last month at a privately sponsored conference on commercial real estate renovation at the University Club of Los Angeles that drew more than 75 people.

“Conversions can be difficult to accomplish in some cases, but from a public policy perspective they make a lot of sense,” the Department of Building and Safety’s director, Warren O’Brian, said at the University Club conference. O’Brian estimated that there are 1,100 aging and underutilized buildings in Los Angeles alone that could be revived if renovated or converted.

“The excess of office space has depressed rental levels to the point there is not the huge differential that there used to be” with other types of real estate, added Fred W. Pierce, director of real estate for Price Waterhouse. As a result, he said, other kinds of developments are increasingly attractive.

Pierce said that with some beleaguered lenders willing to accept as little as 70 cents on the dollar for troubled property, developers who examine conversions “might find they are able to make one work.”

Santa Monica architect Chester Widom said that how developers and cities cope with the downturn has broad implications for urban rejuvenation. “There will never be a better time to realistically plan for the renaissance of the depressed sections of (cities), given the current slump in the commercial real estate market,” said Widom, who is also president of the Los Angeles Headquarters City Assn.

“There are so many underutilized old office buildings out there (that) it’s going to require a change in thinking on all of our parts to solve this glut of office space,” he added.

Widom said one possibility is to use half-vacant and difficult-to-convert office buildings for schools, hospitals or other institutions. He said a business group has approached his firm about drawing up plans to convert several mid-Wilshire office buildings to schools.

The CRA, which has a $30-million budget for rehabilitation work, is trying to make a dent in its huge inventory of old buildings by providing financing for several creative developers, including one who is converting the old Freemont Insurance Co. building on 9th and Bonnie Brae into 220 apartments for the elderly.

“There’s lots of buildings out there that have real potential, but there is so much demand from developers (for CRA money) . . . that we are oversubscribed for the year,” said Bill Jones, CRA’s director of rehabilitation.

The conversion religion has struck some former skeptics, such as Michael N. Kriozere. The San Diego developer, who never before converted commercial property, is spending $5 million to transform a four-story silk factory into 29 condominiums. He’s doing so at the urging of city officials who wanted to preserve the abandoned 80-year-old structure.

“Most developers probably would have torn the building down and started from scratch,” said Kriozere, citing the generally higher cost of rehab work over new construction. But he said converting the site will be profitable for his company even though “there’s no government subsidy involved.”

Although developers without subsidized financing proceed more slowly, many have found conversions financially attractive without government money.

Mark Development Co. of Kingston, Pa., purchased a half-vacant, 20-year-old shopping mall in Tallahassee and converted it to offices for state agencies. The conversion increased the property’s cash flow by 500%, said David Zook, the company’s executive vice president.

Last year, developer Trammell Crow Co. transformed an old tire plant in City of Commerce into the $118-million Citadel, a 35-acre development that includes a discount retail center with 44 stores and several office buildings. The project involved converting an abandoned five-story industrial building.

Outside Denver, the 3,000-member Happy Church congregation paid $7.8 million for an ailing shopping mall at a foreclosure sale last year and made the 10-acre site their headquarters. For a cost slightly less than what it would have taken to build a facility from the ground up, members converted the mall into a preaching hall, a nursery, Sunday school classrooms and administrative offices, a church official said.