Live-Work Developments

These Spaces for Home, Work -- or Both -- Are a Growing Investment Option

By John Protopappas

Live-work buildings, once the province of artists who needed inexpensive space with high ceilings and good light, are going upscale. As the prices for live-work condominiums exceed $1 million for the most attractive units, live-work is becoming a very good investment, both for developers who are turning abandoned factories into condominiums and for investors holding units as rental properties.

Live-work spaces, which typically are in converted warehouses or factories in urban areas, often are referred to as lofts. As the name implies, some people live in the spaces, others use them as offices, and still others use them as a home and office combined.

Generally, the first residents in live-work communities are artists who don't mind the lack of amenities and the frequent necessity to skirt zoning laws, which have been slow to recognize the areas as neither residential nor commercial but a hybrid of the two.

Before long, others follow: business owners, architects, lawyers, and a growing number of telecommuters who want live-work space for the same reasons that artists do. The appeal is large expanses of floor and wall space, high ceilings, and the unique interior decorating possibilities.

Urban Locations
Live-work areas tend to be found in major metropolitan areas, which have an ample supply of obsolete factories and warehouses. However, some smaller towns, such as the Hudson River community of Peekskill, New York, are beginning to encourage live-work as a way of revitalizing downtowns suffering from the shift of retail to suburban shopping malls. Any city with old, interesting structures is a potential candidate for live-work renovation.

City officials generally are enthusiastic about live-work redevelopment, because the results preserve the historic landscape and offer a usable solution for vacant buildings. Areas with successful live-work developments include South of Market (SOMA) in San Francisco; SoHo and TriBeCa in New York; the Jack London Square Waterfront in Oakland, California; River North in Chicago; and Downcity in Providence, Rhode Island.

In most areas of the country, the upscale live-work projects are condominium developments. In San Francisco, some SOMA condominiums are approaching the $1 million sales price. In fact, of 532 residential units built in the city in 1996, 157 were in SOMA, making it the neighborhood with the most construction activity.

A National Trend
Most live-work projects are in converted buildings because of the economics: It is less costly to renovate a building than to start from scratch. But as live-work developments become increasingly popular, scattered projects are developing specifically for live-work.

Providence has focused on a 10-block area of its central business district (CBD) known as Downcity, which already had a large artists' community because of the presence of the Rhode Island School of Design. Three years ago, the city council adopted a master plan specifically designed to encourage an arts and entertainment district. Residential uses have been permitted throughout Providence's 25-block CBD since 1991, and live-work has been spurred by a law exempting restored historic properties from parking requirements. A local arts organization, using a $500,000 city loan, purchased a headquarters that includes performance space, 12 semicommunal apartments, and 12 studios. They are small—about 300 square feet each—but rent for only $225 and $125. Artists who rent them are expected to perform five hours a week of communal work.

The artists' community also spearheaded the drive for live-work spaces in Phoenix. In 1989, a small group faced the loss of its warehouse spaces because of the construction of the America West Arena, home of the Suns basketball team. The group and the city worked together to create Jackson Street Studios, pledging their small-business relocation funds for renovating a former warehouse. There, 15 studios ranging from 700 to 2,700 square feet initially leased at $0.50 per square foot. To accommodate the artists, the Phoenix city council also approved a zoning variance for the parking requirements and specifically zoned 30 square blocks for live-work space.

In New York City, live-work has become truly trendy. In the words of the New York Times, you can find live-work spaces "in TriBeCa, SoHo, North Gramercy, Flatiron, Chelsea, the Meat Market area, the Financial District, across the river in the Williamsburg section of Brooklyn—anywhere in New York City where art collectors, bankers, designers, stockbrokers and hip upper-middle-class parents might consider living in enormous sheetrocked spaces."

A few years ago, New York City developers paid $15 to $50 per square foot for such space; last year developers were paying $100 per square foot. In one month alone last year, at least a dozen buildings totaling more than one million square feet in the TriBeCa area were being renovated.

Today's New York lofts are bigger than before—sometimes 2,000 square feet or more—and are designed for city families who previously would have considered living only on the Upper West Side. Prices for loft condominiums in one building last year ranged from $550,000 to $585,000, with monthly common area charges from $1,300 to $1,600. Others have sold for as much as $1.5 million. The new buyers also expect services such as 24-hour doormen and an on-site property manager.

Just across the river from the Loop business district in Chicago, the River North neighborhood is a hot spot for residential conversions. In the past three years, more than 350 condominiums have been built in older industrial buildings. At Chicago's Union Square Lofts, once home to a sewing machine manufacturer, more than 50 percent of the condominiums sold in the first three weeks of preconstruction sales last year, with prices ranging from $115,000 for the smaller units to $400,000 for the 2,200-square-foot, two-bedroom penthouse. As in New York, the upscale loft buyers are demanding amenities. The West Ontario Street Lofts, for example, provide 24-hour doormen, a dry cleaner, and a health club. Another includes an enclosed park and a sun deck.

In the Bay Area, gallery spaces, courtyards, and fountains all help to maintain high occupancy. As more telecommuters move into live-work spaces, high-speed T-1 telephone lines for Internet access also are a major draw. To afford these perks, a building typically needs more than 30 units to provide economies of scale and to support common-area amenities.

In Denver, which has experienced some new construction, advertised prices range from $250,000 for a 1,600-square-foot loft to $750,000 for 4,500 square feet. Kansas City sales prices recently ranged from $89,000 to $109,500 for about 1,750 square feet.

Rental Units Scarce
For whatever reason, quality rentals are harder to find. A survey of the classified sections of major newspapers across the country found a much higher number of condominiums than rentals listed as live-work or lofts. Few of the rentals were at the very high end. Advertised rents in Philadelphia's River Quarry area last spring were $525 to $625 for 1,100 to 1,400 square feet and $825 for 1,900 square feet. Kansas City rents were $450 for a studio and $750 for a two-bedroom. Lofts in Boston were offered at $850 to $1,200 for a one-bedroom unit and $1,200 to $1,800 for two bedrooms.

The lack of quality rental units is surprising since live-work units can be better investments than traditional apartments. In Oakland, for example, the average rent for live-work space is $900, compared to the median rent of $700 a month for conventional apartments.

In addition, large live-work buildings are strong candidates for institutional or real estate investment trust investments. The lower cost of renovation, the proportionately lower cost of property management, and the predictable income stream provide a substantially higher investment return than that of a conventional apartment building. The desire for amenities such as an on-site laundry and dry cleaner provides additional revenue sources.

Investor Benefits
The benefits of live-work to the investor are many. Older buildings often are considered unwanted sites, resulting in lower purchase prices. In addition, the cost of rehabilitating live-work space is less than the cost of new construction. Few or no interior walls result in lower associated construction expenses. Indeed, the appeal of live-work space is the rough, unfinished, industrial look. This spare design style allows for many savings opportunities when comparing live-work construction costs to those of a conventional apartment or office space.

To personalize their spaces, many tenants install their own improvements. In fact, this is a desirable feature of live-work units. It creates pride of ownership, which results in longer-term, often community-minded tenants who take better care of the property. The combination of more sophisticated, committed, and long-term tenants results in low management costs and high occupancy rates. The ability to use the space as either live or work also attracts a broader range of potential users than traditional apartments.

New Type of Tenant
The renovation of the American Bag Building in Oakland into live-work space illustrates the variety of tenants that live-work developments attract. The three-story former headquarters of a burlap bag manufacturer and the Union Hide Company, constructed in 1917 for $7,000, is listed by the California Department of Parks and Recreation's Historic Resources Inventory as "the most decorative of all the buildings" in Oakland's waterfront warehouse district. The original American Bag Company sign still adorns the exterior, and the original Union Hide Company sign now decorates a wall in the residential penthouse on the third floor.

The first and second floors house a California assemblyman, an advertising agency, a marketing firm, and the regional headquarters of bookseller Barnes & Noble, Inc.

On the third floor are business owners who moved from the Santa Cruz beachfront community to the city "because our children had all left home and we were looking for something a little less suburban." They took over the entire 5,000-square-foot third floor, creating a residence with a central open kitchen, living room, and raised dining area that covers a 2,700-square-foot expanse. Special decorative touches include a former San Francisco Police Department motorcycle and a 2,000-pound British telephone booth that had to be lifted in by crane. This couple could afford to live almost anywhere and, indeed, does have additional homes in the California mountains and in Hawaii.

Another person who chose to return to urban life is former California governor Jerry Brown. Unable to find an existing building that he liked, he went to Madison Park Financial Corporation to develop the $1.3 million structure that serves as his residence and headquarters for his "We the People" nonprofit educational foundation. His 18,000-square-foot building, with corrugated metal exterior and indoor atrium, also includes a 500-seat auditorium and a studio for his radio talk show.

Financing Available
With residents like these, a growing number of city officials are considering live-work projects a smart vehicle for revitalizing their downtown spaces. A variety of financing possibilities exists through the issuance of municipal bonds and the use of city redevelopment funds. Additionally, tax credits relating to rehabilitation and historic preservation may be available if the properties qualify.

Peekskill, with a population of 20,000, deliberately turned to live-work as a way to attract artists while revitalizing a downtown that was becoming deserted as stores moved to the suburbs. In 1991, Peekskill began looking for property owners willing to convert upper-story space into artists' lofts and studios with help from low-interest loans financed by federal community development block grants. The National Endowment for the Arts and the New York State Council on the Arts also made grants available for conducting feasibility studies and drawing up architectural plans for a 33-unit live-work artists' condominium.

Meanwhile, the city rezoned 10 downtown blocks to allow artists to both live and work in the upper-floor studios. As the result of a public relations and advertising campaign to reach artists, about 20 relocated to downtown Peekskill within a year. Three years later, a branch of Westchester Community College and the Westchester Arts Workshop opened a joint center in an abandoned storefront, further adding to the vitality of downtown. Businesses have followed, using the downstairs for offices and converting upper floors to live-work spaces.

The artists "have volunteered to spend time in the schools; they've started a community garden; they've given their services to the library and museum; they're on the Paramount [arts center] board; they've helped to found the Peekskill Arts Council; and they are actively involved with the downtown business community and chamber of commerce," said planning consultant Ralph DiBart in a recent interview with Planning magazine on the success of the city's live-work efforts.

Renovation Challenges
Live-work spaces, however, are not without challenges. When considering a building for conversion, evaluate the costs of potential hazardous waste cleanup and earthquake retrofitting where appropriate. Zoning regulations, the original construction, and the previous use of the building can make these costs formidable. Careful preliminary studies can help to determine the success of the project. Bringing a building up to code includes meeting Americans with Disabilities Act provisions and other requirements such as sprinklers.

In rental units, standard kitchen and bath fixtures most often are used in order to keep rental rates down. Condominium developments, on the other hand, often include upgraded fixtures.

Though live-work is becoming more mainstream, some cities still have a limited view of these projects. As recently as 10 years ago, most live-work spaces were considered illegal units. In fact, city officials were confused about which building codes to enforce: residential or commercial. More zoning regulations specific to live-work are being adopted.

Another consideration is the amount of noise surrounding the developments. Many live-work buildings are located near active railways, freeways, and working factories. Dual-glazed windows and insulation are a must.

In addition, if a building is one of the first live-work structures in an area, there may be few or no retail services nearby. This can be an inconvenience for the tenants. However, as these developments increase in number, that drawback is likely to disappear. Where two or three live-work buildings exist, the retail begins to follow.

Most important, the actual design of the units is critical to the building's successful long-term occupancy. Design plans should utilize natural light and allow for a sense of space. Consideration of not just the floor plan, but the entire cubic square footage, including stairwells and lofts, is very important to the marketing of the property. From artist to telecommuter, space and light are the integral factors to success.