In the USA or Western Europe, projects involving the conversion of office space to residential are on the increase. In Poland, they are still few, isolated cases. “The lack of incentives to convert unprofitable office buildings into flats and flats effectively blocks many investments. Today we prefer to demolish rather than redevelop – the question is whether we as a society can afford it,” says Dr Jan Gąsiorowski, associate in the Warsaw office of Wolf Theiss.
In the US or Canada, the conversion of office buildings into residential buildings is a widely discussed topic and is increasingly being pursued by investors there. The conditions prompting the conversion of office buildings to residential are similar to those observed in Poland – rising interest rates and pandemonium have led to a surge in commercial loan defaults and vacancy rates, especially in older office buildings offering less prestigious locations and fewer amenities.
Vacancy levels in the US or Canada are quite similar to the market in Poland. According to CBRE, the office vacancy rate in Manhattan in May this year was 15%. In comparison, in Poland, the vacancy rate in the main regional office markets has been on an upward trend since Q2 2022 and at the end of Q3 2023 it stood at 17.3%, emphasises Dr Jan Gąsiorowski.
As the expert notes, there is a boom in new office construction in many major centres overseas, as larger companies move into buildings offering modern space, a range of amenities and solutions in line with ESG strategies. This means degrading office space in city centres, while housing is in short supply. The natural step should therefore be to convert office buildings to residential – as a cheaper and simpler solution. However, such conversion is proving very difficult due to both regulatory and financial obstacles.
Many local authorities in the US and Canada are inclined to prepare incentives for companies that make the conversion of office space to residential more investor-friendly and feasible. Thus, costly and disruptive demolitions in city centres are avoided, which, along with new construction, generate significantly more CO2 emissions than the conversion of existing buildings, notes Dr Jan Gąsiorowski.
One of the leaders in such conversions is the city of Calgary in Canada. In San Francisco, on the other hand, the authorities are trying to adapt current building codes to accommodate conversions, and in Washington, D.C., the mayor wants to devote significant resources to a tax credit programme to support such conversions. There is also buzz about the ideas of the mayor of New York, who is pushing for changes to zoning regulations, with an industrial zone in midtown Manhattan to also allow for residential uses.
A similar situation exists in Germany, where there is an increasing shortage of housing. According to specialists from JLL, the conversion of office space to residential has not played a major role in the German market so far, but changes are already visible. In Frankfurt, the number of conversions has more than doubled in the last 15 years, the specialists calculated, and vacant office space in seven major cities has the potential to turn vacant space into 20,000 flats by 2025. This corresponds to around 40% of the demand for residential space in metropolitan areas that will emerge in the next two years.
Meanwhile, in Poland, which is facing an equally painful housing shortage, the number of conversions of office space to residential is small compared to the scale of demolitions. Perhaps the situation in the country will be changed by the developing PRS market, where investors may be tempted to make spectacular conversions, for example in neighbourhoods traditionally associated with office buildings. An example of such a trend may be the sale by the Octava Fund of the Obrzeżna Center office building to an investor who intends to redevelop it and change its function to residential. Obrzeżna Center is a building located at the main intersection of the Mokotów Business Area – colloquially referred to by Varsovians as Mordor.
Some office properties in Poland, especially the older ones, just like in the USA or Germany, are in a very difficult economic situation. Often the sale of such assets means the liquidation of the building. This can be seen in the large number of demolitions that can be observed recently in the centres of Polish cities, explains Dr Jan Gąsiorowski.
For example, Atrium International is disappearing from the landscape of Warsaw, and Empark Mokotów Business Park will be radically rebuilt. The same is happening in every major city in Poland. In Krakow, the Plaza gallery is disappearing, and in Wrocław the Impel office building. At the same time, experts point out that there is a lack of incentives, either financial or regulatory, to convert and redevelop existing projects. 16 August 2022. The Ministry of Development and Technology published a draft law on the conversion of the use of certain non-residential buildings into residential buildings, which was later renamed as a draft law amending the Act – Construction Law and the Act on facilitating the preparation and implementation of housing investments and accompanying investments. Conversion according to the draft was to be carried out without the need to obtain a building permit, except for structural elements of the building. However, a shortcoming of the draft, which was to be adopted by the Council of Ministers in Q3 2023, was the limited time in which conversions could be carried out. This was only to take place within 2 years of the legislation coming into force. In addition, provisions were included in the draft according to which the municipality would receive a preferential offer to purchase premises or residential buildings corresponding to at least 5% of the total area of the development, which would significantly increase the cost of such a conversion. There are currently no announcements regarding the further fate of these provisions.
The lack of regulations to stimulate the conversion of office space to residential puts such ambitious and interesting projects in a difficult situation. Currently, investors only have the option of using the regulations and the mode under the so-called developer lex, which does not always promote conversion as a desirable direction for redevelopment. The example coming from overseas, where we have both tax and legal incentives, is an interesting direction that allows local authorities to stimulate and make a real impact on urban space. Appropriate regulations dedicated to the conversion of office buildings to residential can increase the number of such projects carried out on the Polish market and thus ensure a significant increase in the available residential space in Poland’s largest cities, concludes Dr Jan Gąsiorowski.
According to JLL calculations in the German market, the cost of converting offices to residential space in major cities is on average almost 50% less than for new buildings, despite a number of challenges associated with the construction and adaptation of such buildings. In addition, CO2 emissions are significantly lower for renovations. According to recent studies, buildings are responsible for 38% of global CO2 emissions, with 28% coming from the operation of buildings and the remaining 10% due to the energy consumption required for the materials and technologies used in construction.
