A Viable Future for L.A. Starts With Public-Private Partnerships

Editor’s note: This article originally appeared in Commercial Observer.

Providing financial assistance or incentives for housing projects to materialize must be considered by city officials to break through the pending doom loop cycle. The City of Los Angeles has an opportunity to partner with the private sector to contribute to the regrowth of the city. It’s not a new idea, but one that — in these times — would avoid a downward spiral of disinvestment and flight from Downtown Los Angeles if approached more aggressively.

Without debate, downtowns are crucial in the ecosystem of society. Historically, people have converged in cities to find employment, attainable housing, access to mass transit, and to make social connections. As found in the Gensler City Pulse Survey 2021, people are looking to downtowns for a vibrant and mixed-use environment rather than just a place to work.

Urban centers across the country are suffering from a slow return to the office, and from workers and residents leaving downtowns in search of less congested spaces and more affordable lifestyles. In turn, municipalities are reeling from reduced real estate tax bases, as well as fewer transit occupancy taxes and property taxes. According to CoStar, the average price per square foot for commercial office space in Downtown L.A. is currently $242 per square foot, down over 50% from $523 in 2020.

Many U.S. city centers are suffering from housing shortages that drive up costs for residents and force many to move to suburbs, which creates traffic-heavy commutes, mental health stressors, and additional financial strains. Los Angeles alone has a deficit of over 500,000 affordable housing units, making it one of the least affordable places to live in the U.S.

With many office tenants vacating or downsizing their spaces, the possibility of converting those offices to housing or other uses becomes an attractive alternative that could ease housing shortages that drive up the cost of living. Based on numerous recent studies, we know that there are large financial gaps between the cost of a building conversion and the market value of converting office towers to housing. Ultimately, conversions trend toward not making financial sense to pursue. In Downtown L.A., costs of a full conversion can range between $350 and $460 per square foot, which is higher than ground-up construction. These numbers pose an unfinanceable risk for developers. California’s strict requirements around seismic upgrades, exterior wall upgrades for acoustics and operable windows, and new mechanical, electrical, and plumbing systems are expensive to achieve. While buildings and land costs have decreased, we cannot rely on those prices dropping to zero to bridge the gap.

In downtown, the city has a responsibility to explore every avenue to promote its economic and social resilience. The City of Los Angeles is pushing to ease the approval process and provide zoning incentives for developers through the Adaptive Reuse Ordinance 2.0, currently under review. Provisions like easing parking requirements, allowing greater square footage, waiving minimum unit size requirements, and increasing open space requirements are steps in the right direction, but are very unlikely to be enough to make projects viable.

In Canada, Calgary faced a similar challenge, and in response has implemented a bold and successful program where developers are granted $15 per square foot for demolition and $75 per square foot for construction to help make deals feasible to deliver the additional residential units that are needed. Developers seeking to provide more housing complete an application to request funds and, if eligible, the city then provides the requested funding.

Cities like San Francisco, Boston, and Los Angeles have an opportunity to implement similar programs. From Gensler’s study of hundreds of buildings in 25 U.S. cities, we have found that only 20 to 30% of high-rise office buildings are potentially feasible to convert to housing without financial assistance from the city. Economic impact studies show that investments from the public sector paired with private sector investments will create a larger tax base and revitalize our urban cores through an upswing in residents who will subsequently contribute to the regrowth of businesses that represent a thriving downtown. If the City of Los Angeles embraces partnerships with private entities like developers and banks, downtown’s revitalization can have a viable pathway to a vibrant future.