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Downtown conversions – too much demand chasing too little product

Ted Duckworth’s math tells him downtown residential is a-can’t-lose proposition. He’d be at the table but the dealer has no more cards to deal in a game that is all about converting decades-old commercial buildings instead of building anew.

“Of the available buildings somebody else is already working on them,” said Duckworth, principal of Duckworth Realty.

“I wish we had more of them,” added Duckworth, a pioneer of downtown conversions with Capitol Street’s Electric 308 building which he modernized and turned into a mix of commercial, office and residential earlier in the decade.

If he looked long and hard he could probably find some niche opportunities for residential in the Central Business District. But the big opportunities? “Everybody is chasing those hard,” he said.

Real estate investor Don Hewitt and attorney Herb Irvin teamed up to catch one. They say they expect to close in a few weeks on the purchase of the Regions building, formerly the Deposit Guaranty Bank building, at 200 E. Capitol St.

Seller Hertz Investment Group, which owns the adjoining Regions Plaza, dropped the price on the 17-floor, 186,000 square-foot tower from $5.5 million to $4.5 million. Hewitt said he and his investors plan to put more than $23 million into renovations of the building, constructed in 1929 with additional floors added in 1957.

Hewitt, managing member of Advanced Technology Building Solutions on Raymond Road, said initial plans are for 125 apartment units, mostly lofts, to be sandwiched between three top floors of office and retail on the first floor and basement.

Hewitt said he designed the project mix to qualify for federal New Market Tax Credit, which limit the residential portion of a project, but instead will rely on federal and state historic preservation tax credits to help with costs.

“If they (New Market Tax Credits) become available we would be able to use them,” he said.

With 700 people on waiting lists for downtown apartments, Hewitt said he is confident his 125 units will lease up quickly.

Duckworth, too, is confident they will. “We still have lots of room for growth,” he said.

“Every building that has come on line (for residential) has filled up.”

Duckworth said statistics show that 1 percent of a metro area’s population would prefer to live in the Central Business District. With 555,000 people in metro Jackson, “I think we could support 3,000,” he said.

A market study done by the developers of the planned Old Capitol Green mixed-use development determined 2,250 units are needed “now,” said Ben Allen, president of Downtown Jackson Partners, a public-private entity created to enhance downtown business and its future development.

Allen estimates that 575 people live full time in the Central Business District. Apartment units in or near the district number 345, all of which are leased, he said.

Duckworth said Little Rock shows what Jackson could do in establishing downtown residences. Time was it had “maybe 500 units downtown. Now it has several thousand people living downtown.

“It just started with a dozen units here, 30 units there. We need people to just keep doing those conversions.”

Just who are these downtown residents?

Duckworth figures they are mostly people who strongly desire to live in the Central Business District. They don’t necessarily work in the CBD, either, he said.

The downtown office market has had a sustained vacancy rate of 25 percent or higher, while residential fills up as fast as something comes open. “I don’t know that the office market is tied” to residential occupies, Duckworth said. “It’s just people who want to live downtown because they like the environment.”

Real estate developer Mike Peters sees it as a “chicken and egg” situation that creates the likelihood that new residents translate to more businesses and office occupants. “More of the people living down there will be business decision-makers. And if they are living there, they will put their businesses there.”

Peters, principal of Peters Real Estate in Fondren, was an early downtown converter. In 2005, at about the same time Duckworth was giving the Electric 308 building a makeover, Peters transformed the decades-old Plaza building at 120 N. Congress St. into a mixed use with restaurants and retail on the lower floors, executive-style residential flats on floors 10, 11 and 12 and offices on the middle floors.

“A year or so later I collaborated with some people on the 555 Tombigbee Street building. We built the Tombigbee Lofts . We put those in an old warehouse. They have been very successful.”

Instinct – not science – guides the conversion business, said Peters, who converted the Dale office building at North State Street and Fondren Place into apartments and recently completed renovation of Fondren’s old Duling Elementary School building.

“It’s just a gut feeling — good location, good ambience, those sort of things,” Peters said of selecting his projects.

In any selection of a three-quarter-century old office for conversion to other uses, it’s wise to keep in mind that the architects of the time had office comfort and efficiency in mind – not downtown dwellers. So the architect who does the conversion plans has a sizable job ahead, downtown developers say.

“The biggest challenge in the high-rise building is water pressure,” Peters said. “The buildings were not made to run showers, dishwashers, washers” and the like.

In some instances, new water lines must be installed, he said.

“And then there’s the upgrading of the electrical to handle some of the challenges of an office and apartment.”

New fire codes, new safety codes – all of those come into play, Peters added.

He predicts that in the short term, downtown will have several more apartment buildings open up as well as new retail. “That, in turn, will help solidify the office market. I think it will all come together.”

What Peters described, said lawyer-turned-developer David Watkins, is “bright flight” by which “folks are returning to the city. These are folks who want a different lifestyle. They don’t want a suburban setting. They don’t want a yard to deal with.”

Watkins’ belief in “bright flight” led him to take on an ambitious restoration of the-then dilapidated King Edward Hotel and the neighboring Standard Life building.

Watkins, principal of Watkins Development, brought the Central Business District 64 high-end apartment units with the restorations of the 12-story King Edward, now a Hilton Garden Inn. He simultaneously converted the former Standard Life building to apartments, adding 76 luxury units to the CBD inventory. They all filled up within 90 days and have remained that way, Watkins said.

“I think there is a proven market now.”

He said he is especially excited about the future conversion of the Regions building. “That somebody would be doing that development is great.”

Watkins has since taken on other commercial restoration projects, including the revival of Jackson’s famed Farish Street entertainment district.

“Frankly, I’d be doing more” conversions to residential, “but I just don’t have the time and capacity to take on any more projects,” he said.

Though he is on the sidelines for now, Watkins has some favorites he says are ripe for conversion to a mix of residential, hotel and retail.

The former Robert E. Lee Hotel near the Capitol comes to mind first. But the state has occupied it since 1969 and last year completed a $4.1 million renovation of the 115,300 square-foot building. Legislation introduced the last two sessions to sell the circa 1930 building for private development has gone nowhere.

A state office building “is not the highest and best use of that building,” Watkins said, and noted the building’s historic significance makes it ideal for restoration as a hotel and office building or even office and residential.

Next on Watkins’ list is the Lamar Life building, which he said is not very practical for office use anymore with its small footprint. “It is a spectacular building,” he said, though he conceded, “there are challenges with it.”

Capitol Towers is another prime conversion candidate, Watkins added.

Though already mostly residential, the Plaza building on North Congress would do well to convert entirely to residential, according to Watkins.

Peters, the Plaza owner, said he thinks the buildings downtown such as the Lamar Life will eventually be converted. “There are always people downtown kicking the tires” on the old buildings, he said.


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