Talk to a local architect that specializes in zoning and conversions. 

@Sabrina MaplesIn most cities MF is considered a less offensive and higher and better use than commercial / hotel, so while it will take an architect, surveyors, and the rezoning process it could be possible.

I have vast experience from working with Trades People, Architects, Engineers and City Officials.

Do you have recommendations for an architect/contractor team? 

From the information you've shared here, seems as though option 1 would be your best bet.You should consult an architect and run a more in-depth analysis on the construction costs if you're seriously considering rebuilding.The cost of demolition and construction on this could be north of $600K.

That said, the nickel and dime type mentality is prominent in the pm game.

CA designated some areas in San Diego as "opportunity zones" because they aren't the best neighborhoods, but many of them are close to downtown and are expected to grow and become more prominent neighborhoods. 

And you should enjoy a good period of maintenance free and low insurance premium cost for your investment.If you are not very knowledgable about building houses, or building quality houses, I would ask around and have an owner representative who can negotiate on your behalf (it can be a family member or trusty friends who have credible experience in the industry, or hire a third party professional such as a reputable architect/engineer).

The professionals needed for development include lawyers, engineers including civil, geotechnical, environmental, and traffic, architects, title companies and surveyor.I may be telling you what you already know and I could go on and on but it would be easier to discuss one or two areas rather than explain all of them.

Architect Developer here too.