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Commercial Real Estate

Taking Up Residence in Office Space

Real estate: Developers and cities are turning to housing to fill in the gap when commercial tenants drop out.


Faced with a glut of retail space and weakening office rents, many Los Angeles-area developers are adding high-density housing to properties that once would have been reserved strictly for offices or stores.

The combination of homes and businesses in the same building or block goes against decades of standard development practices. But changing real estate economics, a renewed interest in urban living and rising residential rents and property values are leading developers to rethink long-held assumptions.

In Long Beach, for example, about 350 new apartments and condominiums will replace part of a failed shopping mall. The owners of an empty office building in the heart of downtown Los Angeles' financial district are planning a residential conversion. In Irvine, developers are contemplating building hundreds of housing units in the sprawling business district near John Wayne Airport.

"This is a trend that's going to last for the next five years," said Los Angeles real estate consultant Larry Kosmont. "You're going to see an onslaught of residential on these [commercial] sites."

It was only a few years ago that many cities shied away from new residential development because of the additional burdens it places on city services. Instead, they courted tax- and job-producing shopping malls and office parks. Now, with the Los Angeles area flush with retail and office space, many cities see mixed-use housing projects as a way to support existing retailers while reducing traffic and creating lively urban neighborhoods.

In Irvine, the addition of hundreds of high-density housing units to the office parks and strip malls of the Irvine Business Complex might broaden the city's appeal to people who prefer a more lively scene than exists now, say city officials.

"There is a lot of enthusiasm for it," said Sheri Vander Dussen, Irvine's director of community development. "It might be a wonderful environment for a single person who wants to live in an urban area . . . and isn't interested in mowing the lawn on the weekend."

While mixed-use development is hailed among urban planners as an important tool for fighting sprawl and traffic, real estate developers have a more pragmatic reason to cozy up to the concept: money.

Escalating rents and housing prices have made residential development a far more lucrative and secure investment in many areas than a shopping center or office building. In some places, such as downtown Los Angeles, apartment landlords are raking in rents on a per-square-foot basis that are as high, if not higher, as those received by owners of nearby office skyscrapers.

"Under most circumstances, you would be willing to pay a higher price for office or retail use," said David Dale-Johnson, director of the real estate program at USC. "But in this market . . . the best development opportunity to be in now is residential because of the growing population and the anticipation of continued growth."

In bidding for property, residential builders can often top the best offers from office and retail developers, say real estate brokers. In Orange County, residential land has sold for as much as $3 million an acre. In Los Angeles County, prices are above the $2-million-an-acre mark.

"We could sell every piece of commercial property in Huntington Beach for residential," said land broker Craig Atkins of O'Donnell/Atkins Co. "The residential guys can pay the asking price and are a higher caliber of developers."

Developers and cities are turning to housing to fill in the gap when commercial tenants drop out.

In Burbank, city officials are calling for up to 110 apartment units in addition to office buildings and shops for a downtown redevelopment project. Housing was added to the mix after a previous developer was unable to find financing to build a hotel on a portion of the 3-acre site across the street from City Hall.

Financing should be much easier to come by for the apartment portion of the project, said Susan Georgino, community development director for the city of Burbank.

"Housing is probably the highest and best use of land right now for its economic return," said Georgino. "There is a very substantial, pent-up demand for housing."

Plans to transform the former Sanwa Bank headquarters in downtown Los Angeles into a 540-room hotel also have been dropped in favor of a new project featuring retail and residential uses, according to Kennedy Wilson Inc., which owns the 13-story building at Flower Street and Wilshire Boulevard.

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