For more than three decades a non-descript property covered in ivy in central Bristol was the office of chartered surveyors Hartnell Taylor Cook. The surveyors are moving out and have sold the property to Acorn, which plans to convert it thirty apartments and five newbuild apartments on site.
“With residential values and demand growing, the decision to redevelop the property seems an obvious one,” said Ian Lambert, investment partner at Hartnell Taylor Cook.
This is not just true for Bristol. Many European countries have housing shortages while at the same time more office space is becoming redundant due to hybrid working. Converting that surplus of office space into residential seems a logical solution. However, it turns out it is not as easy as it sounds.
David Tonks, a partner at property consultancy Cushman & Wakefield, and who leads its repurposing team, reckons that only a third of the office buildings that land on his desk are suitable to transform into residential space in the widest possible sense, including student accommodation and care homes. A recent study in Germany found that 15 to 20 million of square metres of outdated office space of a total of 75 million square metres in the country's A and B cities could be converted into residential units. This could result in 150,000 to 200,000 housing units in the 21 cities that were part of the study by Garbe Institutional Capital, PwC Deutschland and Colliers. Most of these outdated offices could become obsolete.
So, what makes a successful transformation? As always in property, it’s all about location. The office properties need to be in or near city centres with good transport links, places where people want to live. Somerset House, the property in Bristol, is in a leafy area of Georgian townhouses with small, independent shops.
Last month, Ardian bought a 3,000-square metre office property across seven floors in the centre of Madrid. It plans to convert the office building into a high-end residential building with 10 apartments and 40 parking spaces. The deal works because of the property’s location close to Paseo de la Castellana in a prime residential area, and its current design, shape and size that allows the transformation of the asset explains Pelayo Barroso, director of research at Savills Spain.
“The typical examples will have surfaces below 4,000 to 8,000 square metres,” said Barroso.
From an economic perspective, the deal also makes sense. In that area in Madrid, super prime residential properties could reach prices above €17,000 per square metre, almost double the €9,000 per square metre for office properties, he said. In the past ten years, there have been 130 property transactions where the new owner bought to change the use, according to figures from Savills. In 84% of the cases, they wanted to move away from office use and in 56% of the cases they wanted to turn it into residential, with hotels the next most popular use.
Madrid authorities have recognised the case for transformation and are introducing new legislation that enables the change of office use to residential. There is a small catch though. The housing needs to be affordable, and the owner cannot change its use for 15 years.
For many investors residential is not limited to apartments but may also include, for example, student accommodation. Earlier this year, US investor Hines bought two office buildings in France with the aim of converting them. In Charenton-Le-Pont, it will transform a 26,500-square-metre office property into a mulit-use residential scheme with 650 student beds. In Hauts-de-Seine, it is aiming for a similar number of beds by converting a 17,000-square-metre office building.
In all these cases, the properties need to lend themselves to being transformed. Apart from size, layout and structure will be important. Investors will need to consider floor loading capacity, floor-to-ceiling height and the depth of the floor plates. Especially in larger offices floor plates can be too deep.
“Where the floor depth is challenging, bringing natural light into a floor plate is so expensive that viability just goes out the window,” said Cushman & Wakefield’s Tonks. “Typically, buildings that would be compliant are offices from the 1980s and some of the 1990s that have floor depths of 15 to 18 metres that convert reasonably well.”
Northstar REIM and Ares Management Corporation last year paid €62 million for a portfolio of six former office properties that were successfully turned into residential properties. The buildings, near transport hubs, were converted by developer Certitudo. All the buildings have an A or B energy label and fall within the regulated or the affordable segment of the market. The properties have not quite shaken off their office image. It is easy to mistake Het Tomadohuis in Dordrecht, south of Rotterdam, one of the properties in the portfolio, for an office building (pictured). An investor familiar with the six properties called it “transformation 1.0”.
“It has not got the quality you’d expect from newbuilt,” he said. “It was a basic concept with not too much emphasis on sustainability. It was really meant for people looking for affordable accommodation. The question is whether you want to have such projects in your portfolio for the long term.”