Building renovation in today’s market environment

Adaptive reuse, conversion and upcycling of industrial and commercial buildings (“conversion”) for more popular uses are quickly becoming the direction of many experienced developers, investors and companies under certain circumstances. They try to create opportunities from current and forecast changes in occupancy demand and to reduce the rising costs for new buildings and permits.

Both large and small companies are currently reformulating their requirements for their premises and work environments. More management, employees and employees work remotely, which requires less square footage or, under certain circumstances, has to be relocated to smaller satellite locations. At some point there will most likely be a more significant return to work and the occupancy of currently existing built-up space will increase. However, it appears that the absorption factor will not return to pre-pandemic occupancy levels. Many companies have already made lasting changes to their employment strategy and no longer require full-time office occupancy for their employees.

The long-term permanent effects of teleworking may change once it stabilizes. Nevertheless, it seems that in the future many more companies will need less office space and will respond flexibly to the requirements for the physical presence of their employees. Not all companies will be flexible. Even under these circumstances, it would be very helpful if there were more housing available nearby as the economic hardship caused by the pandemic has again drawn attention to the need for affordable housing. And since apartment buildings have the lowest barriers to entry, further growth in this sector can be expected.

Many business districts are struggling with the highest vacancy rates in decades; the west side of Los Angeles, particularly Santa Monica, was attacked. In addition, there is an additional new offer from the pre-pandemic cycle online. As a result, commercial and retail rents will give way and are effectively lowered. There have been some increases in uptake lately, but mostly in short-term commitments.

Customer service, outside internet, technology, management, and entertainment companies are examples of applications that have experimented with remote workplaces and come to the office less often. It is obvious that the demands of the employees for more time at home and high quality family time will only cause a permanent change in the demands on the workforce at the beginning. A crucial question is how much vacant commercial space will no longer be needed in the foreseeable future (ten years or more) and which conversion strategy is best, if applicable?

This gap between declining office demand and the spiraling housing market suggests an obvious solution: converting old office buildings into apartments. The home office concept has been around for years, so how hard could it be to turn this the other way? Well, it’s not a breeze, it is safe, and the costs and obstacles are numerous. Still, it can be doable in certain circumstances, especially in a beach community like Santa Monica.

Due to the density of housing and traffic problems, Santa Monica can take a greater leadership role in supporting this concept. In fact, Santa Monica has already had numerous conversions, particularly from former industrial and lightweight buildings into “creative offices” that support design and entertainment from the 1980s onwards. This process has become more difficult because of the code restrictions in place.

Santa Monica could better support conversion to residential and other commercial mixed uses by;

  1. Allows more flexible zoning for mixed uses.
  2. Providing specific economic incentives for qualified projects (which are not paid for through additional taxes passed on to existing businesses and residents).
  3. Providing an optimized and faster tracking of the permit approval under certain conditions.
  4. Change building and zone regulations for more flexibility and cost savings. This is a big one!
  5. Implement a master plan with specific overlay districts that are analyzed, designed and tailored to the specific needs of the community.

Downtown, including the future of Santa Monica Place and the boardwalk, could benefit if it is carefully planned and designed to support both its businesses and its residents.

Regardless of the results of commercial and residential property absorption, we can learn something here by recognizing the more significant long-term opportunities for positive change that the pandemic inadvertently helped create.

First of all, mixed-use properties reduce the risk and help stabilize cash flows by distributing the range of services, similar to an investment fund, by investing in various stocks and financial instruments. Owning and converting to mixed use property offers diversification and meets multiple market needs, which allows the property to maintain safer levels of performance during difficult economic times.

Many older and one-way properties are more susceptible to changes in demand and are functionally outdated, but can be adaptively repurposed if properly designed and planned. These buildings can achieve higher performance and higher utility value in the long term. Let’s focus more on conservation and preservation rather than demolishing and rebuilding as the first development strategy. As an example, consider the future of Santa Monica Place and its relationship with the boardwalk and the future needs of Santa Monica residents.

As with everything, there are advantages and disadvantages to be weighed:

On the positive side:

  1. The conversion of old buildings offers a massive advantage over the new building: With conversions, controversies and objections are significantly lower. In today’s world, virtually every major project in any desired area has to go through a lengthy approval process. This process can take longer than building the actual building.
  1. Conversions can result in opportunities and advantages that are not available in new buildings. For example, older office buildings and hotels sometimes have construction details that today’s builders cannot economically replicate. Companies and residents often like these details and thus increase the overall value in the long term. Older industrial and commercial buildings often have higher ceilings than typical apartments, which will also please commercial tenants and residents. Some of these buildings are in favorable locations and in locations where a new building would be expensive.
  1. Recycling a building is a great way to significantly reduce its environmental impact and resource consumption. The infrastructure costs are somewhat reduced by reusing existing systems. Also, and this is very important, there is a historical value in some buildings that should be preserved simply because they tell a story of our city and culture that should not be forgotten and destroyed.
  1. The zoning with mixed use offers a more comfortable accessibility of workplaces, goods and services with correct planning. With alternative transportation options nearby, the need to drive so much is reduced. Transportation, energy costs, and the pollution generated would be reduced by less commuting and getting to and from work, not to mention the additional time savings that could be more productively used for personal and family time, fitness, or other activities.

On the minus side:

  1. Some commercial buildings are not well suited for residential and mixed uses due to the poorly designed huge, dark and deep floors. The center of the building can be designed without significant effort for storage and mechanical systems that do not have easy access to light and air.
  1. Living spaces consistently need more light and air. If parts of a commercial building are too far from a window, they may not meet the regulations or quality of life expected of its potential residents. The bathrooms can be centralized at the exact locations on each floor, with the plumbing only serving that part of the building. A residential building, on the other hand, requires bathrooms and sanitary facilities in every unit. The power connection also has to be rerouted, passed through new meters and often rebuilt.
  1. Some indoor shopping malls have similar design and size problems as large office buildings. They would often have to be completely rebuilt to allow living space and mixed uses.

In these examples, rents would increase to account for these additional costs, which could be substantial and run the risk of being above then current market prices.

When new projects are designed and built from scratch, we consider the value added by designing a building that can be more flexible and modified with significantly less waste and future environmental impacts. It’s time to think about the importance of investing more upfront for flexibility for future savings and less environmental impact in the long run. A built-in flexibility would protect itself against future investment costs for changes in use and possibly give the project a higher long-term value.

This is directly linked to some other aspects of commercial construction. At the beginning of a commercial lease, expensive leasehold improvements are often built for the specific needs of a tenant, which are torn down and disposed of at the end of the lease. Sometimes these improvements are only actually used for 5 years or even less. Flexible designs and modular systems that can be reused and reconfigured with less time and expense would also reduce environmental waste and potential leasing costs.

In summary, it can be said that well thought-out mixed-use concepts support commercial operations and residential use can be well balanced with office and retail use. The conversion of many older or functionally outdated small and large buildings into an improved master plan environment would make a significant contribution to a better living, economic and working solution.

By Michael Jolly for SMa.rt (Santa Monica Architects for a Responsible Tomorrow)
Mario Fonda-Bonardi AIA, Planning Commissioner; Ron Goldman, FAIA architect; Dan Jansenson, architect, building and fire protection officer; Michael Jolly, AIRCRE; Thane Roberts, architect; Robert H. Taylor, Architect AIA: Sam Tolkin, Architect; Marc L. Verville MBA, CPA (inactive)

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