Turn uninhabited and outdated offices into homes. This is the business that is gaining momentum in some of the world’s most important cities. This trend has been emerging in the US, France, the UK and the Netherlands for years, but housing shortages and the rise of hybrid work models are driving it forward. New York is one of the cities that has given in to this formula the most. In fact, it was the city council itself that approved a plan that would allow offices to be converted into 20,000 apartments with space for 40,000 new residents. The largest project is 25 Water Street in Manhattan, a 1969 building formerly the headquarters of The Daily News, where 1,300 offices will be converted into rental apartments.
In Spain it still occurs on a small scale and without the support of public administration, which limits its scope, although the phenomenon is obvious. The consulting firm CBRE has identified 156 conversions in Spain since 2013, with a significant increase since 2019. “Obviously the number has increased due to the pandemic and the emergence of new forms of work,” says Adolfo Ramírez-Escudero, president of CBRE in Spain. The maximum peak of interventions was reached last year.
The consulting firm’s analysis concludes that nearly 224,000 square feet have been converted from offices to apartments over the past decade. “Apartments for sale are the product into which real estate is most often converted,” says Ramírez-Escudero. However, also in other modalities such as rental, coliving (communal living model) or senior living (complexes for seniors). Another 164,000 square meters of office space was converted into hotels. Logically, the bulk of all these actions (86%) took place in Madrid – where so far this year there have been 200 million worth of change of use transactions – and in Barcelona, although there are also other cities where the phenomenon Seville, Bilbao, Cádiz and the Balearic Islands can be observed in the early stages.
Madrid – where there are 308 office buildings with almost 1.5 million square meters of Class C (lower quality) office buildings, 269 of which are located within the M-30 – is the city most ripe for redevelopment in the coming years. “We are already working on more than 200,000 square meters of space for possible conversion and are supporting owners, investment funds and project sponsors in this transformation,” says the President.
Changes in use not only have a direct impact on real estate, but also on the revitalization of cities. Ramírez-Escudero believes that “repurposing buildings can help solve the problems we are currently facing: lack of land, lack of housing or the need for a more sustainable and efficient real estate stock.” This does not necessarily mean housing too come onto the market at affordable prices, especially if they are built in central locations. Quite the opposite. A good example is the transformation of the old Deutsche Bank tower at Passeig de Gràcia, 111, in Barcelona, into 34 super-luxury residences managed by the Mandarin Oriental hotel chain, recalls Alberto de Frutos, General Manager of CBRE Project Management.
There is currently a huge polarization of assets. Demand for offices is concentrated in Class A properties (in Madrid, for example, the vacancy rate is minimal at 2.3%), in financial districts and with solid sustainability records. For this reason, the biggest candidates for transition are office buildings with little technological development and no adaptation to decarbonization policies. These are properties with high vacancy rates that require significant investments to modernize and are no longer profitable, explains De Frutos. In these cases where the numbers don’t add up, change of use is presented as the best option. Especially when you take into account the excessive interest of developers and investors in buying buildings in urban centers to build luxury apartments there. This happens with a mixed-use building (residential and service) in the heart of the Salamanca district (Madrid), co-owned by Socimi Merlin Properties, which is receiving great interest from buyers who want to build apartments.
The consulting firm EY theoretically calculates how many buildings in Madrid and Barcelona would be vulnerable to a change of use and concludes that there are 2.5 million square meters of office space in both cities that could be converted into housing over the next 20 years Market includes 28,000 apartments (20,000 in Madrid and 8,000 in Barcelona). “It is outdated office space that cannot be occupied, is of poor quality, is rented below market price, both in the center of cities and on the outskirts, and allows for both uses, tertiary and residential,” says Paloma. García, real estate manager in EY’s Strategy and Transactions practice. Now it would be necessary to evaluate them individually to determine their viability. Many variables play a role: “The urban planning analysis (permitted uses) and potential uses, necessary investments (investments), building morphology, architectural challenges…” lists Ramírez-Escudero.
Municipal procedures
For this reason, the industry is calling for support from the public sector. “This transition requires public-private collaboration, since the administration should contribute to this process by streamlining urban planning procedures,” says García. In addition, a correction in the sales prices of these office buildings is necessary. “If the numbers are not correct, an adjustment will be necessary at a reasonable price,” adds the president of CBRE.
There are several examples of recent transactions. ASG Homes has purchased an office building in the Salamanca district to build 28 apartments. In the past they also carried out the conversion of a property in Fuencarral, 77, turning a land previously used by the public administration into several apartments. “The chronic shortage of new housing in city centers leads us to expect that the repositioning of outdated or disused properties will increase in the coming years,” says Víctor Pérez, CEO of ASG Homes. “The changes in the use of tertiary assets towards residential properties are the result of the development of cities, which means that some assets, often located in prime areas, are no longer suitable for their original use due to a lack of investment in them or other reasons are profitable “Citizens’ consumption habits have changed,” says Pérez.
Developer Grupo Lar has just taken over the headquarters of Hacienda de María de Molina, also in Madrid. The building will be used for mixed use and 180 apartments will be built for sale in the main tower. “It is a clear trend for the future,” says Miguel Ángel Peña, CEO of Living de Lar. And he adds: “The main reason is the growing demand for living space compared to today’s declining demand for offices. The main obstacle is the regulation, which, depending on the property, does not allow housing instead of offices.”
Spanish manager Dazia Capital and British fund Aermont have acquired an office building in Tres Cantos to convert it into 176 apartments for flexible living solutions. And Orinoquia Real Estate, the real estate investment vehicle of Axel Capriles’ family, has taken over offices on José Silva Street (Madrid) and converted them into 20 apartments. For its part, Acciona has acquired an office complex in Madrid from Mapfre and Iberdrola to convert it into rental apartments, a model known as build-to-rent.
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