Adaptive reuse projects are all the buzz in the commercial real estate sector these days . Repurposing underutilized property is an excellent strategy for many CRE owners to maximize value . States like California and cities like Los Angeles are working to implement adaptive reuse ordinances that allow for by-right adaptive reuse conversions with more flexible building codes for existing properties . Municipalities increasingly see adaptive reuse as a method to convert underutilized commercial buildings into housing so that they can more efficiently meet housing needs outside of ground-up development . According to Yardi Matrix , developers nationwide converted 151 commercial buildings into residential apartments that totaled 20,100 rooms .
“ So far , through adaptive reuse alone , this new decade has already created nearly 32,000 apartments , 41 percent of which are in former office buildings ,” according to a recent Yardi Matrix report .
However , the process and costs of adaptively reusing commercial buildings into housing can be ripe with challenges . It is
critical for CRE owners who are considering adaptive reuse to perform the appropriate up-front due diligence — including land use , design , engineering , construction , rent studies , and financial analysis — to determine the feasibility and risks of these projects . Developers must also understand the jurisdictional landscape to determine the best path for any entitlements needed to support a use change .
One successful project in Santa Ana , Calif ., provides a case study for those interested in adaptive reuse . 888 On Main is a 148-unit workforce housing property located within a qualified opportunity zone . One of the first adaptive reuse projects that was approved under Santa Ana ’ s Adaptive Reuse Ordinance ( which was adopted in 2014 ), this
CREATIVE REVITALIZATION
property was built and used as a 10-story high-rise office tower in the heart of Santa Ana ’ s downtown in the finance and government services district . The property was constructed in 1967 with Welton Becket & Associates ( the designer of the iconic Capital records building in Hollywood ) as the original architect . Initially , the building served as the Orange County headquarters for Security Bank and later for the Social Security Administration , who vacated in 2014 . This unique midcentury poured-in-place structure totals 133,083 sf of gross building area with underground parking .
888 On Main presented the architect , developer , contractors , investors , advisers , and managers of this project with unique opportunities and challenges in converting a 55-year-old office building into multifamily housing .
Since the property is also in a qualified opportunity zone , the new investment group structured a portion of the capital stack to allow them and their investors to take advantage of these significant tax incentives .
A MARKET TRANSFORMATION Santa Ana is a city that has been undergoing a transformation . 888 On Main is near a downtown streetcar project that makes it an ideal live-work-play housing project . The property is also adjacent to the prestigious Orange County High School for the Arts , which is a major employer in the downtown core . While this project was underwritten prior to COVID-19 , when office vacancy was lower , the pandemic caused vacancies to rise well above 20 percent in Santa Ana , further diminishing the value and utility of office space in the market . Countering the softening office market , though , was the increasing demand for housing in Santa Ana , which has surged over the past few years . Plus , 888 On Main is located in an opportunity zone , making it an ideal site for workforce housing .
PLANNING AND DESIGN The original developer and contractor , Caribou Industries , kicked off the conceptual planning and design of this project in 2015 . As is the case with any successful adaptive reuse projects , the location and original bones of the property made it a good candidate for adaptive reuse to housing . The layout and geometry of the corridors and elevator shafts , the depth of the floorplates , the height of the ceilings , the secured parking , and the unobstructed views from most of the floors helped provide a vision for the what the project would eventually become .
Even though the building had inherently beneficial design characteristics , the challenges of designing and converting the building to housing were extraordinary . Extensive capital upgrades at both the building and unit level had to be designed and programmed into the project as required by the adaptive reuse ordinance and local governmental agencies . These building-level capital upgrades included seismic upgrades , tower fire sprinklers , a gas-powered generator , security features , and a plumbing waste / vent system that could handle the increased demands of the occupants . Other system and amenity features that were designed and programmed in at the unit level included utility submeters for electric and water , water source heat pumps , and cabling and internet services .
Regarding the floorplans , many design decisions had to be made on the unit layout and unit mix , including how to maximize units and efficiently utilize common area spaces . For instance , the original office building only had two restrooms on each floor , which obviously was not going to work for multifamily . Ultimately , designs called for live-work units with somewhat irregular space configurations on the first floor of the building next to the lobby , designing the fitness and entertainment centers on the basement level in the original bank vault , omitting trash chutes , and creating laundry rooms on each floor .
Adaptive reuse projects frequently present design challenges attributable to existing conditions that are not feasible , and sometimes impossible , to alter . In the case of 888 On Main , its historic designation exacerbated that situation because visible alterations to the building exterior were heavily scrutinized and limited .
CONSTRUCTION Construction started on the project in 2019 . The extensive capital upgrades required
30 COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE SUMMER 2022