Time to cash in on your vacant office space. Here’s how to convert it into apartments
Some South Africans are living in luxury apartments with no idea that the spaces used to be offices.
In coming years more vacant offices in central nodes are likely to be converted into entry-level or even upmarket apartments.
This growing conversion trend first hit in the late 1990s, and while Cape Town, Durban, and Johannesburg were the main metros targeted for these redevelopments, more than 30 years later, many decentralised nodes are being targeted.
This was also in line with densification policies in major urban areas and CBDs across the country, says David Green, president of the South African Property Owners Association (Sapoa).
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Frank Reardon of Strategic Property Solutions says the “huge increase” in these conversions is being primarily driven by the “chronic oversupply” of offices in nodes that are well located for residential units.
“In addition to the cyclical oversupply of offices is obsolescence driven by changing work patterns. These include flexible workspace and hours; the increase in working from home that was accelerated by Covid-related lockdowns and safety protocols; and longer-term trends that create more efficient use of office space, including hot desking.”
He says there has also been a huge shift from the primary areas being targeted for conversions, which used to be older CBDs and non-prime office areas. Now, decentralised nodes are also the targets.
“Locations closer to office nodes such as Sandton have become sought after for units targeting the middle-income market. The Cape Town CBD has historically catered for upper-end units and the Durban CBD continues to target primarily entry-level and student housing.”
Paragon Lending Solutions chief executive Gary Palmer says the decline in interest in B-grade office space became evident at least two years ago and since then there has been a number of conversions from old offices to residential living spaces.
“I think there is more investment opportunity in this space.”
He notes there are many such redevelopments in the social housing space as well as for the purposes of providing smaller residential units.
The banks are willing to aggressively lend to end-user buyers in the affordable market as well as provide development finance for these conversions, agrees Joel Rosen, managing director of IHS DevCo – a division of International Housing Solutions.
The ability to convert these spaces to a live/work/play offering – which is a huge demand driver at present due to Covid, gives the end-user a perceived value creation in areas that were otherwise inaccessible.
“Developers with access to capital are able now to get decent returns in an otherwise stagnant property market,” he says.
Requirements for successful conversions
Nodes that offer economies of scale where developments/developers can build communities with amenities over time provide for successful conversion nodes, Reardon says. The Bree Street and Braamfontein precincts in Johannesburg stand out as successes.
Rosen says the BlackBrick project in Sandton and some of the newer conversions in Sunninghill are examples of successful office-to-residential conversions.
“These have been well thought out, use the available space to a good level of efficiency and give buyers lots of value for money at affordable prices.”
Green cites The Bolton in Rosebank as another example of a good conversion, saying that this space was previously occupied by Sasol before the conversion into quality apartments being let from R7 500 to R9 000 a month. The Bolton is within 400m of the Mall of Rosebank and the prime Rosebank office nodes, and also offers access to the Gautrain. Factors like these are all important in enhancing the appeal to tenants and owners of well-located residential accommodation.
“The appeal also relies on the facilities that are added to enhance the offering. Here we think of serviced offices, gyms, swimming pools, access to retail, childcare, good security and so on.”
In addition the area also needs to be able to support the levels of sales and rental pricing to get these feasibilities to work, says Rosen.
Green says The Argyle in Craighall, was also a conversion, but to luxury apartments.
“Today many of its residents are unaware that it once was an abandoned office block in a stellar location.”
Where to tread carefully
Limiting factors include the architectural suitability of office space and whether it is financially feasible to convert it for residential use.
“Not all buildings are suited to conversion from a structural, economic or locational point of view.”
Palmer says it is worth noting that the floor plans of some conversions “don’t make sense” or are not customer-focused.
“For example, they build units but the toilet is in the wrong place or there is not enough light. In some cases the conversions even become too expensive. People think it's easy to do a conversion, but it is not.”
Other options for conversions
Palmer says shared office spaces for co-working or even hotels can be created from office space, while Green adds that conversions to hotels, leisure facilities, medical suits or services, and mixed-use developments may also be attractive prospects.
“Currently, the lower interest rate on bank debt is also facilitating viable conversion of property, including retail property, to other uses.”
When undertaking conversions Green points out that the initial acquisition cost of the real estate for conversion needs to be affordable to enable feasible conversion to other uses.
“This is not always the case as the seller’s asking price often render the conversion unfeasible, although time has a way of changing mind sets as market conditions weaken and prospects of office leasing in lower quality office spaces diminish.”
Rosen agrees that conversion from traditional offices to smaller, shared work spaces also work well.
“In addition, large industrial units and retail spaces that are vacant can lend themselves to residential conversions, provided they meet the criteria we’ve mentioned.”