More people are living in apartments that used to be offices as property owners and developers continue converting vacant work spaces into homes.
The trend of office-to-residential conversions was in play before the Covid-19 lockdowns of 2020, but now that remote working is becoming the norm for many companies, more empty offices are in need of reinvention.
Data from StatsSA for February shows that office space planning and completions remain the weakest area of overall non-residential building levels, with John Loos, FNB commercial property economist saying that this is “not surprising”.
This is because the national office vacancy rate was at a high of 18.2% in 2021, according to MSCI.
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Although Loos says the FNB Property Broker Survey recently hinted at the start of some decline in vacancy rates, employment numbers in the office-bound economic sectors decreased during the lockdowns and “have not recovered significantly”.
While landlords have been converting their traditional offices into flexible working spaces, many have also been converting their empty offices into apartments. This trend is not new in the South African property sector, however, says Malusi Mthuli, KZN head at FNB Commercial Property Finance.
“It’s a trend that began well before Covid-19, but has accelerated significantly in the last two years.
“One of the driving forces behind this trend is the fact that property funds continue to offload large portions of their office stock, which most now consider less viable from a returns perspective than properties in most other sectors.”
Fortunately, he says, this offloading of office spaces is “somewhat serendipitous” given the significant upswing in demand for well-located residential properties that align with the changing lifestyles of an evolving working population.
“Prices of empty office blocks are lower than ever, the costs involved in converting those spaces are far lower than building them from scratch – especially from a utilities infrastructure viewpoint, and local governments are actively seeking opportunities to partner with developers to leverage inner-city residential projects as a way of addressing growing social housing backlogs.”
However, Mthuli says it is essential for any developer or investor wanting to get into the commercial-to-residential conversion game to have a “very clear understanding of their target market and their prospective buyers, and then design and price the units accordingly”.
Challenges and considerations
Converting office blocks to residential spaces has been particularly popular in the student accommodation and city lifestyle spaces, says Yianni Pavlou, company principal of Portfolio Property Investments. Now that office vacancies are rising due to work-from-home trends and financial pressure due to Covid-19, he says such conversions will increase. There are, however, challenges, including zoning and building restrictions as well as the actual viability of doing so.
Joel Rosen, managing director at Prime Capital Partners says the main elements to consider are location, size, and the layout and infrastructure of the properties, with economies of scale also important.
“The building needs to be a sufficient size, at a minimum of 50 units, so that the operating costs or body corporate levies are manageable by the owners of the units. Anything less than this is hard to get the financial analysis to work, as costs like security cause the levies or operating costs to be exorbitant.”
He says it is essential that the architecture of the building can accommodate a high-efficiency ratio with its change of use.
“This means that a large amount of the space is easily convertible to units with natural light to all the units, services like plumbing/electricity, and a layout that would make it desirable for a tenant or owner.”
Ideally, Pavlou says, offices in areas like the CBDs which already have access to shopping, transport, education, and other amenities, generally work better for conversion. Offices in mainly residential precincts are also easily converted from a rezoning point of view. Some were even previously residential properties.
Benefits
One of the major advantages is that this movement addresses the shortage of accommodation in sought-after areas, like CBDs, where there are live-work-and-play cultures, Pavlou says.
“It brings people closer to their place of work or study in a structured way.”
He adds that, from an investor or owner point of view, the returns can be greater than office returns provided certain key matters are addressed upfront in the building design, operations, and management.
If buildings have high-efficiency ratios, Rosen says developers would look for those with zoning and services already in place.
“This can save time and costs for a developer, as they don’t need to go through exhaustive holding cost periods to rezone the property from commercial to residential.”
Furthermore, old commercial buildings are often built with sufficient water and electricity supplies.
Disadvantages
“There are many,” Pavlou says, explaining that the key lies in what one pays for the building.
“In order to convert, you need to buy at a discounted rate per square metre to account for the conversion costs. Often in office buildings, key items such as electrics and plumbing have been installed for offices so breaking the space into multiple apartments requires additional electrics and plumbing to each unit.”
In addition, the existing floor plate of an office can create problems or make conversion non-viable. An example is where there are too many pillars in a building, or the lifts are located in the wrong places.
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“Factors such a natural light and air conditioning also need to be redesigned to suit multiple residential units.”
The layout of a building can also be a challenge and result in awkward designs, Rosen says. And it is “imperative” that developers assess the services already in the building.
“Some may be aged and need to be replaced completely, like old plumbing, thus substantially increasing the cost of converting the building.”
If the zoning is not in place the process could be “substantially hard and expensive” and make the conversion not feasible.
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