Office space becomes living space: What this conversion involves.

Given the shortage of residential space in cities and occasionally empty office buildings, the change of use from office to residential space is an obvious conclusion. What potential and what challenges does this bring? Credit Suisse on the future sustainability of former office space conversions.

Fredy Hasenmaile

Head of Real Estate Analysis, Credit Suisse

2023 Swiss office property market study

Read in detail about the developments on the Swiss office property market.

07/12/2022

The office real estate market is changing

The sharp acceleration of change in the work world caused by the COVID-19 pandemic is putting pressure on the office real estate market. Working from home and desk-sharing concepts reduce the need for square meters of office space per employee. Although this trend is even overcompensated in the long term by employment growth, digitalization, and tertiarization, Credit Suisse continues to expect a one-time reduction in office space requirements of about 15% by around 2026 due to persistently reduced office presence in many companies.

Temporary interim high in office space demand

Demand on the Swiss office space market is temporarily at an interim high. This is due to catch-up effects from the COVID-19 pandemic as well as strong employment growth. For 2022, the additional requirement is expected to amount to 840,000 m² – in 2023, however, it should settle around a much lower level of 295,000 m².

Growing demands regarding the quality of offices

Hybrid working models and increasing digitalization influence not only the space requirements, but also requirements regarding the quality of these areas. For example, there is an increasing demand for well-located, modern spaces that strengthen the identification of employees with the company and can be used flexibly as needed. As concentrated individual work is increasingly done from home, the office becomes even more important as a place of communication and exchange. Even though cyclical demand for office space has recently increased significantly, the change in how we work, particularly for properties in poor microlocations, is leading to persistent vacancies. 

Too many offices, too few apartments

While many cities have seen such an increase in the number of vacant offices, the reverse is true for apartments. Accordingly, the question of whether empty offices can be converted into new apartments is becoming increasingly significant.

Compared to keeping empty offices, conversion has valuable potential:

  • Creation of new living spaces
  • Contribution to the consolidation of city centers
  • Preservation of existing building structure through conversion reduces gray energy
  • Reduction of energy consumption per m² through modern energy standards

Potential challenges in the event of conversion

However, in the case of a potential conversion project, legal, structural, and economic issues must be clarified. Is the conversion compliant with zoning? This issue is cited by project developers as one of the main barriers to an increased conversion of office buildings. If so, are the location and building even suitable? There are a number of challenges to consider in connection with conversion:

  • Many office locations are not suitable for residential use due to noise and pollution.
  • The surrounding infrastructure should fit into a residential building and include shopping facilities and leisure facilities, for example.
  • The construction method must allow for a floor plan to be redesigned.
  • Since residential buildings consist of smaller units than office complexes, the development often requires additional stairwells.
  • The more elaborate outer appearance of apartments compared to offices also requires changes in lighting or the addition of balconies and loggias.
  • Due to additionally required stairwells, elevators, and supply shafts within the core of the building, the ratio of rentable space to gross floor space is often worse in case of conversion than in the original building or in new buildings.

2023 Swiss office property market study

Stay up to date on developments concerning office space in Switzerland office with the 2023 Swiss office property market study published by Credit Suisse.

07/12/2022

How much does converting office space into apartments cost?

The necessary structural measures to convert office space into living space can result in high costs. For such projects, around 75% to 80% of new construction costs are often assumed as a guideline. However, there are studies that show that the financial expenses can be as high or even higher than for comparable new construction projects.

 

From an investor's point of view, the high construction costs are not an obstacle per se, provided that sufficient income can be generated from the renovation. In addition to the property-specific conversion costs, the expected rents and vacancy rates for the respective segments are therefore particularly important. Specifically, it is important to consider how much lower the vacancy rate and how much higher the rental price per square meter must be in order to compensate for the costs associated with the conversion and to achieve at least the same return on a likely smaller area.

Factors influencing the conversion decision

Conversion into schools as an attractive solution

In addition to conversion into apartments, conversion into school space is an option being increasingly considered in the event of permanent vacancies. The conversion into school space is not only significantly less expensive in terms of construction, but the renovation time is also shorter than for apartments. In addition, schools are generally attractive tenants with a rather long-term perspective and low default risk.

Despite potential, the number of conversions is likely to remain modest

In Switzerland, Bern and Zurich are among the pioneers in the conversion of office space to living space. However, across Switzerland, conversion is still quite rare. This is explained not so much by structural obstacles, but rather by the often insufficient profitability, which is due to the high construction costs on one side and the low difference in rent between living and office on the other. Given the sharp rise in prices for commodities and construction materials and the increasing weight of sustainability considerations, the question of whether the renovation of an existing property is worthwhile compared to demolition and new construction is now becoming even more important.

What do the forecasts for the office real estate market mean for you as a landlord? We would be happy to help.