Why investors are banking on conversions

With many businesses re-evaluating their office footprint amid changing work patterns, office leasing is falling in cities across the world.

Global office leasing volumes are around 6% lower than a year ago, and 24% lower than pre-pandemic levels, according to JLL research.

This is prompting owners and investors to consider turning offices into other types of real estate, from housing to hotels. It’s often happening in buildings where an office’s size, and location, no longer suits the modern workforce’s preferences. 

“We may now be witnessing a structural shift in some markets,” says Raphaelle Bour, Lead Project Manager, Work Dynamics at JLL.

There are a number of reasons behind the shift from meeting tenant needs, addressing technical or environmental obsolescence, to local-government tax breaks.

However, challenges still exist, not least financing projects, which can be complex in the current economic climate. But for many landlords seeking to mitigate rental risks, the longer-term benefits are becoming clearer.

“Many investors are now considering repurposing office buildings as a strategic capital investment,” Bour says.

Rethinking real estate for modern markets

Where refurbishment upgrades a building’s quality and sustainability, repurposing adapts buildings for new uses.

“Repurposing is typically considered at the end of a building’s lifespan, when meeting stringent sustainability regulation is likely to incur heavy capital investment and carbon impact,” says Bour. “However, evolving market demands mean that repurposing can also be feasible before then, as a more strategic way to secure long-term cashflows.”

Office-to-residential repurposing, for example, can be a solution to acute housing shortages; the 250 million square feet of vacant office space in the top 35 European cities could provide 500,000 homes, according to JLL data. While 90% of global real estate investors anticipate repurposing U.S. offices into residential assets, other sectors are drawing interest, too. Around 70% of investors are considering data centres, student or senior housing, hospitality and leisure, as new uses.

Understanding financial feasibility

For those looking to repurpose, there are financial complexities to navigate. For one, office valuations haven’t caught up with lower demand, impacting lenders’ terms.

“Many existing office valuations remain high, reflecting pre-pandemic trends, and high interest rates make refinancing more expensive,” says Bour. “What’s more, the impact of recent inflation means we’ve seen a 25% increase in project capital expenditure.” 

Office-to-hotel conversions can be one way to weather inflationary risks. In Sydney, for example, numerous heritage buildings have been converted over the years, benefiting from robust hotel demand and the ability to set daily room rates as a buffer against inflation.

However, the original source of acquisition funding is key. “If an office was acquired using an office-specific investment fund, pivoting to a different use often requires first selling the property and securing alternative financing,” says Bour.

Diversified funds that allocate capital across sectors offer the greatest flexibility and opportunities to capitalize on market performance, Bour adds. “When one market is low, other assets can likely compensate and stabilize returns.”

Strategic value capture

Metropolitan governments are starting to offer incentives to repurpose underutilized offices.

In New York City, where the office vacancy rate of 18% is twice its pre-pandemic level, an adaptive reuse initiative offers tax breaks for residential conversions. In Paris, developers converting offices to residential blocks are permitted to build 30% higher, increasing potential revenue.

“Policymakers are also simplifying previous conversion hurdles, hoping to reduce the number of stranded assets whose upgrade costs outweigh their worth,” Bour says.

The City of London plans to fast-track applications to convert unused older offices, while across the U.K., office buildings that meet certain building codes don’t require formal permission for residential conversion.

Investment strategies also inform the scope of repurposing projects.

Short-term value-add strategies that rapidly upgrade assets to reduce risk and increase appeal can secure returns sooner.

“There’s an opportunity for investors to acquire vacant office buildings, structure the repurposing, and establish new operators,” says Bour. “They can then offer assets to the market with, say, a decade of secure cashflow, something which is currently in high demand – and many large investors are creating diversified funds for this type of operation.”

Meanwhile, a long-term approach allows investors time to recoup capital expenditure on major projects, as well as secure sustained returns.

“Given the outlook for today’s office sector, repurposing should be seen as a defensive strategy that creates high-quality assets,” says Bour.

Whether structured for short or long-term returns, effective repurposing not only targets financial value, it enhances the social and environmental value a building brings to its surroundings – factors that increasingly dictate asset resilience.

Flexibility drives future value

Feasibility studies, structural understanding of an asset, and local market analysis are critical to identifying the best conversion approach, says Bour. Take the 39 York Street building, where data-driven conversion secured the sale of a vacant Sydney office building, now slated to reopen as a hotel.

Meanwhile, in U.K. cities, a rapidly growing life science sector has driven investors to repurpose underutilized offices into high-quality laboratory spaces.

Advances in technical infrastructure could bring greater flexibility, helping assets keep pace with fluctuating markets. “Technical challenges are the greatest constraint to structural changes,” says Bour. “We’re focused on developing structural and façade design that’s able to convert to different uses with minimal refurbishment and capital expenditure.”

Ultimately, deep insight into evolving markets underpins effective future-proofing strategies.

“Successful repurposing considers where the market will be in the next 10 to 30 years,” Bour says. “Long-term value relies on understanding the market pulse, anticipating occupier and regulatory demands, and capitalizing on an asset’s structural potential for secure cashflow.”

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