As any office landlord knows, the past few years have been far from plain sailing.
The pandemic catalysed a shift towards hybrid and flexible working that was already taking shape, and with office attendance falling, vacancy rates have skyrocketed. As many as one third of desks globally now sit empty all week long!
Naturally, this has presented significant financial and commercial challenges, most notably in the form of falling income and plummeting property valuation. To make matters worse, record low interest rates between 2008 and 2022 have quickly become a thing of the past as central banks around the world have upped their base rates – significantly increasing debt repayments and the cost of borrowing.
This all sounds very negative. But the challenges of recent years have crystalised some important truths in the commercial real estate (CRE) sector. Firstly, landlords need a razor-sharp focus on how to maximise income, futureproof their assets and boost valuations as the traditional office model is no longer viable for many. Secondly, as demand from occupiers is constantly in a state of flux, creating real estate that is able to adapt to new ways of usage is key.
A new outlook is required – and in many instances, that means office landlords having to invest in redeveloping their assets for new purposes, which has become a prominent theme in the CRE market over the 12 months.
However, faced with tough business conditions and high interest rates, the margin of safety is narrow. Decisions must be creatively and meticulously considered, backed with a wealth of business sense and evidence to ensure redevelopment projects prove successful.
So, what are landlords’ conversion options?
Landlords are by no means short of options when it comes to redeveloping their spaces. The key is picking the right one based on financial and structural viability as well as potential profitability. Determining that requires an assessment of several key factors like cost of conversion, market demand and growth potential, return on investment (ROI), and impact on overall property valuation.
So, here’s a roundup of the most popular conversion pathways – plus their biggest pros and cons...
In most cases, flexible workspaces are the conversion that makes most sense for office landlords.
Boasting a killer combo of strong growth potential and demand that outstrips supply, flexible workspaces are uniquely positioned to achieve both high rental revenues and boosted property valuations.
The way businesses use office space has evolved. As a result, demand is at an all-time high for spaces that can adapt to these new flexible requirements – JLL forecasts that 30% of all office space will be flexible by 2030, with the global flexible workspace market predicted to reach a value of nearly £133 billion by 2032!
Plus, flexible workspaces remove what is one of the biggest drawbacks of the traditional office: dependency on one or two larger occupants for the entirety of your revenue. With flexible workspaces, often home to a wide variety of occupant types, revenues are bolstered by their diversification, making this a more secure income for landlords.
With a solid backing like that, converting into flexible workspace is just too good to ignore.
And of course, infinitSpace is always on hand to help make this happen. From conception and design to marketing the space and managing day-to-day operations, we can do it all in the most commercially efficient way.
Residential property is another solution landlords sat on empty commercial units may consider.
And it’s a logical line of thinking – a shortage of housing in many parts of the world (certainly in the UK) mean that urban areas are in major need of residential developments. Indeed, the imbalance between supply and demand has contributed to the long-term increase in both rents and property values, which will increase the appeal of converting CRE into residential. In London, for example, as many as 28,000 homes could come out of existing empty office stock.
But this approach presents sizeable challenges.
Redevelopment for residential purposes is near impossible for a huge portion of office stock: structural incompatibilities like inadequate natural lighting and ventilation, layout and plumbing conflicts are rife. And for the few properties deemed suitable, conversion is often costly, sapping profit margins.
Maintaining quality real estate is a massive issue – research shows that office to residential conversion can lead to lower quality properties than those built with residential planning permission due to the various challenges associated with conversion.
Another common option is to convert office buildings into different forms of commercial real estate – typically, retail or hospitality. Like flexible workspaces (and unlike residential real estate), fewer structural obstacles are involved with redevelopment into other forms of commercial property. This can, therefore, be a simpler and lower cost avenue to explore.
The weakness for this type of conversion lies with low demand for such spaces. More than 10,000 shops closed across the UK in 2023, spurred on by the rise of online shopping and high inflation reducing consumer spending. So, if you’re looking for a high growth investment with long-term security, this option also comes with risks.
Whether or not this option is viable is likely to be determined by one key factor: the location of the asset – retail and hospitality venues live or die by where they are located. What’s more, it can be a tough industry to crack, so landlords and asset managers must also have the requisite specialist knowledge to successfully transform and market the space.
Next steps
Flexible workspaces are often the most viable and profitable option when it comes to converting up to 15-20% of an office building; the additional flexibility, services and hospitality provides a great opportunity to attract occupants who are eager to find a home for their employees on longer term contracts.
Of course, landlords do not need to go “all in'' on one option. As we can see with workspaces like our very own beyond Republica, landlords are increasingly embracing mixed-used developments. For example, flexible workspace and residential units could fill the upper floors of a tower block, while the ground floor houses retail outlets. Those who own or manage office buildings may well lean towards an approach that blends multiple uses on different levels of the building, diversifying and futureproofing the asset while still allowing them to tap into that demand for flexible workspaces.
What matters most is that landlords take action to ensure their assets aren’t left behind. While these aren’t easy times for CRE leaders to navigate, a hunger for change, creativity and strong business acumen are just what’s needed to weather the storm. Ultimately, staying informed on the choices available to you is crucial.
Interested in kicking off your own conversion into flexible workspace? Get in touch with the infinitSpace team today!