The conversion of vacant London offices could create 28,000 homes in London at a time when the new homes pipeline is reaching a critically low level, reports CBRE.
In its Office to Residential Conversion in London: The Opportunity & Challenge report, CBRE’s analysis of historic sales rates finds the stock of unsold homes in London could be absorbed in two years. Applying this to the total pipeline of homes, CBRE suggests there is an approximate lifespan of six years’ worth of supply across the UK capital.
CBRE says there is a partial solution in converting existing office stock, which it describes as a major opportunity to add housing and partly respond to the shortfall. At the same time it would help solve increasing difficulty filling secondary offices space as a flight-to-quality trend continues.
CBRE says central London has an office vacancy rate of circa 8.5%, representing around 20 million square feet of empty space, and of this approximately 16 million square feet is considered secondhand stock. It says conversion of this secondary stock could lead to 28,000 homes being developed.
Scott Cabot, head of residential research at CBRE, said that market conditions are making office owners consider conversion to residential more.
“The risk of stranded offices that no longer meet occupier needs or proposed regulatory requirements is pushing the repurposing of these assets to the forefront of investors’ minds, and we are already seeing some evidence of this.
“Our data shows that between the start of 2022 and the end of May 2023, around £1.3 billion worth of Central London office stock had been purchased with the intention of converting it to another use, and there’s more under offer. While only a small percentage of this stock has been allocated to residential use, it does highlight that investors are increasingly pursuing the opportunity to convert obsolete offices.”
According to CBRE, smaller office buildings, which are typically easier to convert, make up a substantial amount of office stock. It says 8.2 million square feet, or 40%, of central London offices built since 1984 are smaller than 1,500 square metres. This brings them under the permitted development rights legislation threshold, which permits a change of use and redevelopment of any commercial building up to a maximum of 1,500 square metres. There is an ongoing government consultation to double the PDR size restriction to 3,000 square metres.
CBRE says that since 2015, a total of 21,000 homes have been delivered through PDR regulation and the conversion of smaller offices to residential use, with a further 9,000 homes in the pipeline. Many of these homes have been delivered in outer London boroughs, including Croydon, Hounslow and Brent.
The adviser suggests that the introduction of proposed Minimum Energy Efficiency Standards legislation will be another catalyst for the repurposing of office stock. Under the proposed regulation, commercial real estate buildings must have an EPC rating of at least B by 2030 to be leased and it suggests the cost of upgrading many secondary and tertiary offices could be prohibitively high.
CBRE points out a series of planning, structural, and viability challenges in converting office buildings exist. This includes residential space standards, which not all office floors can meet.
In London, most empty office spaces are not whole buildings, but instead are within a multi-tenanted office. As seen in the US, a building needs to be predominantly vacant before converting becomes viable. Office stock within the Central Activities Zone in London is also highly protected from conversion. In addition, landlords must market vacant space for at least 12 months before repurposing will be considered.
Luke Mills, CBRE’s residential managing director, noted government intervention will be be needed to ensure conversions come forward from a planning perspective.
“London needs more homes and there is undoubtedly a growing amount of office stock that will need to be repurposed – so the opportunity to convert these offices to residential use is there.
“The proposal to increase the size limit of PDR conversions is positive, but there are numerous challenges that mean larger conversion opportunities will struggle to move forward in the current environment. A review of London’s longstanding land use policy principals would be beneficial, and the planning system needs to further prioritise these conversions to unlock more opportunities.”