Housing crisis: converting offices to homes set to gather pace

Turning unused office space into residential housing might make investment sense, but cost barriers and other hurdles remain.

A rising trend of converting office space into residential housing could help solve accommodation supply and demand problems and deliver big tax deductions, but investors are being urged to first check the numbers and potential obstacles.

While residential rental property shortages have driven up rents and made life miserable for would-be tenants, commercial property investors have battled an oversupply of office space, partially driven by more employees working from home.

“There is a growing global trend of converting office spaces into residential units, and the post-pandemic shift to working from home plays a significant role in this trend,” Rethink Investing co-founder Scott O’Neill said.

“The pandemic accelerated the adoption of remote work, leading to a reduced demand for traditional office spaces,” he said. “Moreover, with the rising costs of building, it’s become more sensible in Australia and elsewhere to repurpose old buildings rather than knock them down and start anew.”

“As a result, developers and city planners are increasingly looking at repurposing these spaces to address housing shortages and revitalise urban centres,” he added.

Empty office space is becoming residential housing across the globe. Picture: iStock

BMT Tax Depreciation said businesses had been reassessing their office space, and while demand for A-grade or prime office space remained strong, there had been a 24 per cent slump in demand for older or subprime office space compared with pre-pandemic levels.

It said repurposing office buildings into residential units was rising worldwide, with 40,000 apartments targeted for unused offices in New York, and overseas data indicating that vacant office space in Europe’s 35 biggest could yield 500,000 homes.

Last year, Australian research conducted for the Property Council of Australia found that office vacancies in Melbourne could potentially be repurposed for up to 12,000 new homes.

BMT said NSW office vacancy rates were currently above 13 per cent, and added that governments globally were incentivising conversions and were working to simplify regulatory obstacles.

BMT chief executive officer Bradley Beer said there was an opportunity to repurpose Australian buildings that were not being properly utilised. “In Australia we have got a number of those,” he said. “It’s not top level, six star-rated buildings – it’s buildings that are harder to lease and hard to upgrade. If it stacks up financially, it’s an option.”

The calculations work better for larger office buildings than small commercial spaces because costs are spread across multiple units, and are less likely to stack up for commercial properties unaffected by the working from home boom – such as warehouses.

“It’s a global trend because there is an opportunity to repurpose buildings and produce residential stock that may be cheaper than starting from scratch,” Mr Beer said.

“There’s a lot more talk of it in that top end of town about can we repurpose these buildings? I think there will be more of them.

“It needs to have scale, size and a number of apartments that’s going to make it work. For smaller buildings, the repurposing costs are going to be a challenge,” he said.

BMT Tax Depreciation‘s Bradley Beer

Rethink Investing’s Scott O'Neill

BMT said there could be significant tax benefits from repurposing office to residential, including depreciation of all new fixtures and fittings, and writedowns for the scrapping of a building’s previous office fixtures.

It has calculated that converting a 1200sq m office space in North Sydney into 12 100sq m residential units could cost $4.2m and produce $263,459 of depreciation deductions in the first year, plus further tax deductions for scrapping totalling $288,626.

Rethink Investing’s Mr O’Neill said turning less-used office blocks into flats could help make renting more affordable and accessible.

“By changing these buildings’ purpose, it rebalances supply and demand across both the office and housing sectors, possibly leading to livelier and more diverse city areas,” he said.

“Older buildings are often more suited for conversion to residential properties. This is primarily because they are more difficult to lease out, leaving commercial building owners dealing with vacancies.

“Since older buildings are typically cheaper per square metre, converting them to residential use can offer more value to the owners.”

Mr O’Neill said obstacles to converting commercial properties could include zoning and regulatory hurdles, which could be lengthy and unpredictable, unexpected expenses caused by construction setbacks or modifications, and environmental and structural complications such as asbestos or lead-based paint.

Financial issues can impact investors too.

“Obtaining loans for conversion projects might be more complicated compared to standard commercial real estate investments,” Mr O’Neill said. “Due to the perceived higher risk, lenders may demand more significant equity contributions or offer loans at elevated interest rates,” he said.

“Navigating these challenges demands meticulous planning and strategic foresight to reduce the risks associated with converting commercial properties.”

OTHER OPTIONS FOR UNUSED OFFICE SPACE

• Co-working spaces for freelancers, start-ups and small businesses.

• Retail outlets, especially if in sought-after locations.

• Event spaces for art exhibits, weddings and corporate events.

• Storage facilities for personal and business use.

• Creative spaces for artists, photographers or musicians.

• Innovation labs for entrepreneurs and tech start-ups.

Source: Rethink Investing.

Originally published as Housing crisis: converting offices to homes set to gather pace