One of the most exciting trends in urban development today is the conversion of office buildings into residential spaces, also known as office conversion development. With changing work dynamics and the growing shortage of housing, there are lots of opportunities for real estate investors to earn some serious returns while repositioning existing assets. Although, it is important to be aware of the risks involved to safeguard profits and minimize losses. To help you better understand the potential of these investments, we have highlighted some of the challenges and benefits below.
Benefits
Housing Demand – As the population continues to grow, housing affordability continues to be an ongoing issue. The demand for accessible living spaces allows investors to earn greater rental income and achieve lower vacancy rates.
Workplace Trends – In recent years, there has been a significant trend towards remote or hybrid work environments. With less employees making the trip to their office, many companies are looking to downsize their office space with lenders looking to reduce their exposure to office mortgages. These trends could allow for more favorable acquisition costs to investors.
Potentially Quicker and More Cost-Efficient Development – Converting office spaces eliminates the need to construct a building from scratch. This assumes that the existing building floor plan can accommodate housing or a mixed use strategy.
Prime Locations – Often, office buildings are located in prime areas near public transportation, employment hubs, and other amenities. The convenience is attractive to prospective tenants, resulting in lower vacancies and higher rental rates per unit.
Challenges
Zoning Requirements and Building Codes – Zoning requirements and building codes vary between commercial and residential locations. They have different fire safety measures, ventilation needs, and structural requirements. It’s important you comply with regulations, and are able to work with the government to change the asset’s usage.
Scouting for Qualified Buildings – Not all office buildings can be converted to meet zoning requirements and building codes. These assets need to be scouted to make sure floor plans, mechanical, plumbing, and electrical criteria can be met. We recommend consulting a real estate professional who can assess if offices can meet these standards before making your investment.
Financial Complexities – After you identify a property that can be converted, there are numerous financial modeling scenarios that you need to consider, including development charges, changes in property taxes, qualifying for financing, transition plan for existing tenants, and so much more! While not for the faint of heart, engaging an expert such as FinalyzeCFO can increase your chances of success.
The conversion of office buildings into residential spaces is a growing trend that can provide some significant returns with lower time to completion. However, there are many complexities which involve thorough investigation and research prior to execution. If you want to learn more, our team prepared a post on how to handle the financial complexities of a real estate deal.
At Finalyze, our experienced team is working actively with clients to provide financial expertise and support to breathe life into existing office space. Click here to book a complimentary consultation today to learn more about these transactions and crush your goals!