Can obsolete offices point the way for living investors?

Across Europe’s top cities, converting vacant office space could provide over 500,000 homes

May 02, 2023
  • Emma Rosser

In downtown Manhattan, GFP Real Estate, Metroloft and Rockwood Capital this year began New York City’s largest office-to-resi project. The conversion of 25 Water Street will see the 1.1m sq ft former JPMorgan Chase office turned into 1,300 rental apartments.

The scheme includes a basketball court, sky lounge, as well as indoor and outdoor pools overlooking New York Harbour. It’s a far cry from less eye-catching out of town office-to-resi attempts on the periphery of the likes of London. Post-Covid, prime city centre sites are hot property, attracting institutional capital with appetite to fund high value assets. Over the past two years, multifamily made up 52% of U.S. office conversions and redevelopment, up from 33% in the previous five years, consistently the most popular change of use, according to JLL research. In Europe, such a shift could provide a huge opportunity for capital targeting the region’s residential markets, while easing housing pressures.

Restricted cities

The number of households in European cities is forecast to grow by 4.4 million over the next decade, according to Oxford Economics, rising 6% over the period as the urban population grows by 4%, outpacing the wider continent’s growth of 4% in households and 1% in population.

A lack of land and nearby green belt areas restrict development in most cities – London alone is forecast to fall short of rental demand by more than 100,000 homes over the next decade. However, JLL research estimates 250 million sq ft of vacant office space in the top 35 European cities could provide 500,000 homes. When applying current residential capital values for each city to that vacant space, the top 10 cities could provide over €100 billion in investment opportunities.

In densely populated Paris, today’s vacant offices could provide 93,000 flats, JLL research found.

Some building owners are already seeking to unlock this opportunity. JLL is advising one owner on an office-to-later living rental conversion. Of course, not all offices are suitable.

However, the site meets all the necessary criteria: it’s close to public transport connections, has six storeys with lifts, tall ceilings to run utilities, and wide corridors making space for wheelchairs. On-street access is essential for healthcare and emergency services, while ground floor entrance halls and public restaurants also provide greater levels of amenity for residents, enabling mixed-use districts that benefit the neighbourhood.

Carbon reduction

Office conversions in the U.K. have historically been via permitted development rights (PDR), providing a smoother route to planning approval and encouraging reuse of redundant space.

However, some developers who focused on selling small, less expensive apartments have struggled as banks refused to grant buyers mortgages, leading to various, high-profile insolvencies and councils moving to block conversion. More recently, investors seeking to futureproof asset values have taken steps to retrofit buildings and improve performance.

In 2021-22, there were 8,359 homes from office-to-resi conversions in England, with a peak of 17,751 in 2016-17, according to government figures from the Department for Levelling Up, Housing and Communities. However, in central London submarkets, current vacant space alone could equate to 43,000 flats, or €21 billion in investment opportunities. In many instances, a conversion could drive greater value, not only financially by unlocking new investment, but also through environmental improvements for the area.

Earlier this year, Sheen Lane Developments completed the renovation in London of Kingmaker House. The scheme, managed by Heimstaden, includes 94 flats created by conversion via PDR and a further 43 units in an extension through a separate planning application. The developer opted to enhance the building appearance and offer public space as part of its planning application.

The conversion also incorporated renewable technologies to reduce carbon emissions by 46%, saving 26.26 tonnes of CO2 per year. Similarly, across town, Abrdn’s Stratford Studios opted for full planning to include external alterations with a focus on carbon reduction – the scheme included photovoltaic cells, increased thermal insulation and EV charging points and was certified BREEAM Very Good.

Local communities benefit through decarbonisation, as well as provision of housing at scale and amenities in mixed-use locations. 

Back in the U.S., various cities have introduced grants and tax incentives to spur more investment in conversions. Working closely with investors, local authorities in Europe could gain real value and change the region’s perception of office-to-resi conversion.