Can Adaptive Reuse of Commercial Real Estate Address the Housing Crisis in Los Angeles?

by Jason M. Ward, Daniel Schwam

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Research Questions

  1. How many units of housing might be created from underutilized commercial properties in Los Angeles?
  2. How do price trends among commercial and residential real estate affect the financial feasibility of AR?
  3. How does the distribution of underutilized CRE overlap with various social goals for the siting of new housing capacity (e.g., "jobs-rich" areas, access to public transit)?
  4. What legislative and regulatory reforms might best facilitate an increase in AR in Los Angeles?

Adaptive reuse (AR) refers to the repurposing of a building for a new, more valuable use while preserving as much of the existing structure as possible. A primary application of AR is the conversion of commercial properties for residential use.

In this report, the authors provide estimates of the number of residential units that could be produced through the AR of underutilized commercial real estate (CRE) in the Los Angeles area and provide evidence on the financial feasibility of creating these residential units. The results suggest that, if the properties identified as underutilized were all repurposed as housing, they would represent about 9 percent to 14 percent of the total housing Los Angeles County needs to produce over the next eight years, according to the Southern California Association of Governments. The authors also estimate the average financial feasibility of these properties for AR and find that the conversion of hotel/motel properties appears to be broadly feasible. However, they also note that the feasibility of AR using office properties—the most common property type in the sample—depends significantly on area-specific real estate prices and the size of the residential units to be produced (e.g., studio apartments versus one- or two-bedroom apartments).

Key Findings

  • The authors identified approximately 2,300 potentially underutilized commercial properties that, if fully utilized for residential purposes, could produce approximately 72,000 to 113,000 units of housing in Los Angeles County, depending on the mix of unit sizes.
  • Hotel/motel properties appear to be the most feasible property type for conversion (conditional on converting rooms directly to housing units). The feasibility of office properties varies, with larger (one- and two-bedroom) apartment types generally appearing to be financially infeasible but with studio apartments showing more promise.
  • The authors developed a simple index to rank neighborhoods in Los Angeles and adjacent small cities according to their desirability as a site for new housing using common social and environmental goals (employment density, rent levels, access to higher quality transit, and commuting time) and found that hotel/motel properties are primarily located in lower-ranked areas, whereas office properties are more common in higher-ranked areas.
  • Insights from a series of expert interviews with architects, developers, and engineers with AR experience suggest that AR projects to convert hotel/motel properties to studio units typically are lower-risk propositions, since these properties already served a residential purpose, whereas the logistical and financial feasibility of converting office and retail properties depends significantly on the characteristics of each building (e.g., overall size, floor layout, construction type, condition).

Recommendations

  • Fostering significant AR development will likely require quickly establishing a robust citywide policy that provides by-right project approval, greatly increased density, and reductions in or the elimination of parking minimums. Additionally, because of the complex nature of many AR projects, policy should specify clear alternative building code requirements and lock in codes and code guidance for the life of a specific project at the time of approval.
  • Ensure that incentives or funding for AR projects incorporate social and environmental goals. A purely market price–driven financial analysis of the feasibility of residential AR may exclude important social and environmental benefits related to the area in which a project is located (e.g., in jobs-rich or other types of high-resource areas) that may warrant the subsidization of certain projects that would otherwise not be feasible.
  • Use incentives, not mandates, to motivate the inclusion of affordable units in AR projects. Evidence suggests that, in high-cost areas (such as Los Angeles), incentives (such as density bonuses) perform better than mandatory rules in achieving affordable housing goals. Importantly, incentives alone will not discourage the creation of otherwise feasible market-rate housing, which has been shown to reduce overall pressure on housing prices, and Los Angeles County needs to create more than 300,000 units of market-rate housing in the next eight years, according to the Southern California Association of Governments.

Research conducted by

This research was supported through a gift from the Lowy Family Group and conducted by the RAND Center on Housing and Homelessness in Los Angeles (CHHLA), part of the Community Health and Environmental Policy Program within RAND Social and Economic Well-Being.

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