Opinion: Will L.A. have an office apocalypse or housing boom? Tax breaks might make the difference

BY JASON WARD

Facing a persistent housing crisis, Los Angeles is doubling down on converting unused commercial buildings into residential properties. Last month, as part of the DTLA 2040 Community Plan, the City Council approved a long-awaited update to the Downtown Adaptive Reuse Ordinance adopted in 1999, which enabled the production of more than 12,000 units of new housing. The update would make more commercial buildings eligible for incentives such as streamlined permits and flexible regulations.

This might seem like the perfect time for office-to-apartment conversions: The persistence of remote work has led to record office vacancy rates in L.A. But the dramatic increase in interest rates over the last year made refinancing loans for office buildings very difficult, prompting defaults and distressed sales. “Maturity defaults” — loans that have come due and cannot be refinanced — have surged. Nearly 90% of office loans maturing this year are likely to face difficulty in refinancing.

In downtown L.A., skyscrapers are selling for half of what they did a decade ago. Given that high commercial real estate prices have typically hurt the financial feasibility of adaptive reuse projects, a steep decline in office building prices could be helpful in theory. But high interest rates also make conversions more costly to finance. Measure ULA — the so-called “mansion tax” that took effect this April — is another disincentive for both selling and converting office properties, applying a 4%-5.5% tax to transactions for commercial properties and multifamily housing properties as well.

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