Converting office blocks to residential spaces can solve a rising problem but not all buildings are suitable, say experts
Homes that once were offices can be attractive to buyers and tenants as they usually offer good location, mixed-use possibilities and greater rental returns for investors.
For these reasons, such conversions have always been popular, especially in the student accommodation and city lifestyle spaces, says Yianni Pavlou, company principal of Portfolio Property Investments. Now that office vacancies are rising due to work-from-home trends and financial pressure due to Covid-19, he says such conversions will increase.
Joel Rosen, managing director at Prime Residential, agrees, saying most of the inquiries are from listed property funds and large commercial property owners who are conscious of the movement by larger tenants to a smaller, shared workspace environments. “This has left them with large vacancies in their portfolios without any viable alternative solutions, other than to potentially convert to residential.” Yet, despite the benefits, there are also challenges, Pavlou says.
“Not all office space can be converted due to zoning and building restrictions as well as the actual viability of doing so.”
What types of office buildings are best suited for conversion to residential accommodation?
The main elements to consider are location, size and the layout and infrastructure of the properties, Rosen says.
It is “critical” that buildings are close to amenities, infrastructure and transport in big urban centres. Economies of scale are also important. “The building needs to be a sufficient size, at a minimum of 50 units, so that the operating costs or body corporate levies are manageable by the owners of the units. Anything less than this is hard to get the financial analysis to work, as costs like security cause the levies or operating costs to be exorbitant.”
Layout and infrastructure are also important, he says. “It is essential that the architecture of the building can accommodate a high efficiency ratio with its change of use. This means that a large amount of the space is easily convertible to units with natural light to all the units, services like plumbing/electricity and a layout that would make it desirable for a tenant or owner.”
Ideally, Pavlou says, offices in areas like the CBDs which already have access to shopping, transport, education and other amenities, generally work better for conversion. Offices in mainly residential precincts are also easily converted from a re-zoning point of view. Some were even previously residential properties.
What are some of the benefits of residential accommodation which has been converted from office space?
One of the major advantages is that this movement addresses the shortage of accommodation in sought-after areas, like CBDs, where there are live-work-and-play cultures, Pavlou says. “It brings people closer to their place of work or study in a structured way.” He adds that, from an investor or owner point of view, the returns can be greater than office returns provided certain key matters are addressed upfront in the building design, operations and management. If buildings have high efficiency ratios, Rosen says developers would look for those with zoning and services already in place.
“This can save time and costs for a developer, as they don’t need to go through exhaustive holding cost periods to rezone the property from commercial to residential.” Furthermore, old commercial buildings are often built with sufficient water and electricity supplies.
What are some of the challenges or disadvantages associated with office-to-residential conversions?
“There are many,” Pavlou says, explaining that the key lies in what one pays for the building. “In order to convert, you need to buy at discounted rate per square metre to account for the conversion costs. Often in office buildings, key items such as electrics and plumbing have been installed for offices so breaking the space into multiple apartments requires additional electrics and plumbing to each unit.”
In addition, the existing floor plate of an office can create problems or make conversion non-viable. An example is where there are too many pillars through a building, or the lifts are located in the wrong places. “Factors such a natural light and air conditioning also need to be redesigned to suit multiple residential units.”
The layout of a building can also be a challenge and result in awkward designs, Rosen says. And it is “imperative” that developers assess the services already in the building. “Some may be aged and need to be replaced completely, like old plumbing, thus substantially increasing the cost of converting the building.”
If the zoning is not in place the process could be “substantially hard and expensive” and make the conversion not feasible.
What types of residential offerings can such conversions offer?
As a positive, Rosen says the conversions his company is involved in target the affordable segment of the market. “This means people can then live in areas that would have otherwise been unaffordable. “If the numbers work in the feasibility, the developer can utilise economies of scale to bring units to an area that never had access to smaller, more efficient units. These savings can be passed on to new tenants or owners.”
Pavlou adds: “With student accommodation, investors tend to keep the properties for themselves while city lifestyle lofts or New Yorkstyled apartments are often sold on a sectional title basis to investors. These vary from the lower end of the market to the top end.”
He says mixed-use opportunities such as retail, office and common entertainment spaces can also arise from these conversions.