As published in PropertyEU September/ October issue

Office to residential conversions have been gathering pace in recent years in Spain, especially among larger portfolio owners and investors as they look to reposition their stock and maximise the value of their assets. This has been particularly prevalent in Madrid and Barcelona where an excess of low-rent office space is a particular pain point.

Encouraged by the Covid-19 pandemic, there has been a significant issue with housing and the accessibility of affordable living spaces in the country for the majority of people both young and old. This has led to the local governments supporting office-to-residential conversions as part of urban development and housing strategies to boost local economies. At the same time, changes in working habits are creating redundant city centre office stock. Converting existing buildings into residential spaces also aligns with sustainability goals and reduces the need for new construction, creating a positive impact on the environment. With many investors prioritising ESG and their sustainability credentials, this has become a key factor in the decision-making process. Reuse is increasingly seen as a preference to demolition and rebuilding, predominantly due to the embodied carbon that is saved by retaining existing materials.

In Madrid, there is approximately 1.8 million square metres of existing office space that holds the potential for conversion into alternative residential properties. It is estimated that this will create an additional 20,000 residential units.

A similar trend can be seen in Barcelona, where approximately 763,000 square metres of office space currently falls short of expected profitability levels for developers or owners that could be repurposed into residential units. This transformation has the potential to introduce around 8,000 residential units into the market.

Many European countries are further ahead of Spain when it comes to having undertaken swathes of these conversions, so it is going to be important to learn the lessons from these similar markets. In the UK a report found that the quality of residential accommodation delivered through Permitted Development Rights was of a lower standard than most new builds. This often derives from the challenges around existing floor plates and the drive to maximise units.

Office blocks are built to be reconfigured, but developers shouldn’t just assume that a block is therefore going to be easy to convert. Consideration needs to be made with regards to access to each unit, especially in relation to health and safety, whilst the heating and cooling of spaces may require considerable upgrades to the existing services. The office to residential trend in Spain is continually attracting investment. The current outlook for Spain is among the most positive in Europe as it is expected that GDP will experience growth of 1.5% for 2023 and 2% in
2024. At the same time, inflation is expected to gradually increase, with predictions that it will reach 4.3% in 2023 before a reduction to 3.2% in 2024.

Across Europe, the trend is also continuing to rise. The big seven cities in Germany face similar issues with housing shortages as their population continues to increase. Frankfurt is one of the cities spearheading the change, more than doubling the amount of office space converted to residential in the last year, with 16% of the Frankfurt pipeline for 2023-2025 consisting of office to residential conversions. Across other cities the change in use of former commercial/ military space accounts for a large portion of commercial completions with 34% in Cologne and a 25% share in Berlin.

Global real estate firm Cushman and Wakefield found that in the Netherlands, empty offices or offices that are likely to become vacant in the near future will potentially yield 11,500 homes for the housing market. These would be produced from 665,000 square metres of office space, which is immediately suitable to be turned into homes. Across the nation, approximately 2.1 million square metres of office space with the potential to be converted into homes is idle.

It is undeniable that office to residential conversions provide opportunities for developers and investors of all sizes to benefit from changing habits. It is also important for them to remember that every building is unique and that the feasibility of each conversion will vary. There are numerous inspections that can be taken to get early indications of what will and won’t be possible, so get those undertaken before deciding on where to invest.