Is office conversion the answer to the housing shortage?

Converting empty commercial properties into residential dwellings seems an obvious solution to the housing crisis, but doing so is not as easy as it sounds.

In the wake of Covid-19, office environments have changed. There’s been a global embrace of remote, and flexible, working arrangements and vast numbers of office workers have not repopulated their former workspaces.

New Zealand has not been exempt from this trend, which is one that seems set to stay - and that’s having an impact on the utilisation of office space.

A recent Colliers report on nine core Asia Pacific cities, including Auckland, forecast that office vacancy rates will peak around late 2022 at around 14 per cent, although it indicates this peak may occur slightly earlier in Auckland and reach only around 11 per cent.

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Last year business management consultancy Meta5 predicted office space could reduce by as much as 50 per cent, while market research by property adviser company TwentyTwo showed 42 per cent of respondents intended to reduce, sublet, eliminate, or relocate from their existing offices.

The upshot is that there are a lot of office blocks and commercial properties which are under-utilised, or even vacant, around the country, particularly in the CBDs of the big cities.

In turn, that’s led to growing calls for those spaces to be converted, or repurposed, into residential dwellings. And those calls are becoming more urgent as runaway house prices highlight the country’s chronic housing shortage.

The conversion of offices into residential dwellings is well-established in the USA, while in the UK, Europe and Australia it’s been a growing trend for some time. Some high-profile examples include the Woolworth Building in New York and the Delta Point development in London.

Closer to home, office conversion has been slower to catch on - although there are some notable examples. In Auckland, one is the former Auckland Council office building next to Aotea Square, which is being converted into a luxury apartment precinct.

A prominent example in Wellington follows a different model.Te Kāinga Aroha apartments are a joint project between Wellington Council and The Wellington Company, which converted office space in the former Freemasons building into apartments for rent.

These types of conversions seem like one solution to New Zealand’s housing problem. So why are we not seeing more of such developments?

Colliers national director of residential projects Pete Evans says office space conversion does have the makings of a trend but it’s not as easy or as commercially viable as many people think.

That’s because there are significant differences between space designed for working and space designed for living. Any conversion needs to take into account a wide range of factors including design, the divvying up of floor plates, frontage and outlook, air and light provision, seismic upgrades, consenting issues and safety requirements.

“The costs of doing this add up quickly, so you’d be looking at least $4000 a square metre to carry out a decent conversion,” Evans says.

“But you might have an empty site next door where a developer could start from scratch and build a brand new, high-end apartment block for about $6000 per sqm. So the conversion might cost a bit less, but not much and there’s fewer issues with a new build as it’s easier when you start with a clean slate.”

At the same time, if a developer was to build some new townhouses or terraced housing on the city fringes, or further out suburbs, that would cost about $2000 per sqm. It means most developers wanting to build affordable housing are likely to go for this option rather than an office conversion.

Evans also believes city fringe areas are on the rise, as both work and lifestyle hubs, and that will affect where developers opt to build.

He does say, however, there have been some interesting office conversions in Auckland in recent years and that we may see more of them in smaller commercial buildings in fringe suburbs like Ponsonby, Parnell and Mt Eden.

Veteran property developer Ian Cassels, from The Wellington Company, behind Te Kāinga Aroha, has a different view. He is a passionate advocate of office conversion and says there is scope for many more such projects in both Wellington and Auckland.

One of the issues is that most commercial property owners don’t want to be residential landlords, he says. “They want a reliable cheque every month without the complexities that come with residential tenants. That story is changing, though, and good commercial propositions are growing harder to find.”

In contrast, people always need a place to live which makes residential property a more consistent and stable option. Commercial landlords might not be keen to embrace that and convert their properties now, Cassels says.

“But, in the end, everything is driven by financial concerns and goals and the direction of the market. A change in mindset will come and more conversions will happen. It’s starting to happen in Wellington: I can hear the whispers and schemes.”

In his view, if a developer has the stomach, perseverance and resources for conversion, that’s a good thing because repurposing empty buildings and encouraging inner-city living has significant benefits for the community.

“Not only does it enable the provision of more affordable housing options for people, but it assists the regeneration of the CBD and contributes to New Zealand’s attempt to become more sustainable by cutting down on car use.”

Cassels puts his money where his mouth is. He currently has three more Te Kāinga Aroha-style projects under way with Wellington Council and he’s also turning Television New Zealand’s former Avalon hub in Lower Hutt into apartments.

While there are hints of a trend bubbling away in Wellington, office conversion is currently more of a trendy idea than an actuality in most places.

Prendos senior building surveyor Leon Goodwin says he is yet to see an upswing in direct engagement from commercial property owners on conversion projects, but the ingredients are there for that to change.

“Many councils, particularly in the bigger cities, have made it clear they are behind greater intensification of residential housing.If the shift to remote working continues and vacancy rates grow post-Covid, that could push a lot of currently uncertain office property owners off the fence.”

If that happens, repurposing office space into residential dwellings could be a good strategy to pursue to retain value, but there are some key considerations for anyone thinking about doing so, he says.

“First up, they’ll need to assess whether the space actually allows for a quality living environment – one that is both desirable to potential residents and yields a profit.

“Careful consideration must be given to natural light, adequate ventilation, quality finishes and whether there is the room required to provide decent sized living spaces. To realise the greatest profit, they will have to assess the potential of the building and the site.”

It’s a different way of thinking and one that doesn’t seem to have become widespread yet, Goodwin adds. “So it’s a matter of ‘wait and see’ when it comes to office conversion taking off in New Zealand, but we’d be keen to see increased action on that front in future.”