The office market is struggling to return to its pre-pandemic status. According to consultancy Savills Aguirre Newman, in the first half of 2019 this segment reached an investment volume of 1,625 million euros, representing growth of 150% compared with the previous year. Four years later, and after a difficult period, the same firm points to an investment volume of 735 million euros in the first six months of the year. The high valuation of subprime offices is behind the low investment activity between 2017 and 2022, according to The Office Property Telescope study prepared by EY.
Although the data is not very favourable, the value of offices in terms of profitability remains high. This is reflected in the latest report by Idealista, which analyses the gross profitability of buying properties for rental during the third quarter of 2023. This study establishes offices as the leading asset, with 12.7%, followed by commercial premises with 9.8%, while garages and housing stand at 7.7% and 7.1%, respectively. So much so that, within a context of price correction, some investors remain on the lookout for potential opportunities with high added value.
Offices converted into homes
In parallel, the transformation of these assets is a rising trend with significant growth potential, according to EY. The conversion of offices that are less attractive for investment into residential properties, mainly those with lower rents, can represent an interesting appreciation opportunity for their owners. Madrid alone has 1.8 million square metres of space that could potentially be repositioned. Barcelona adds another 763,000 square metres.
Changing the use of offices in Spain’s two main capitals, supported by stronger housing demand, would mean that up to 28,000 new residential units could be added overall over the next 20 years.
This is the path already taken by major cities in other countries where there is pressure on the residential market and an excessive supply of office space. This is the case of New York, which has launched a plan to transform offices built before 1990 into 20,000 new homes. To this end, it offers developers assistance from public officials to facilitate procedures and has rezoned an area of Manhattan known as Midtown South. Boston, San Francisco and other US cities are working along the same lines, facing countless empty office buildings and an insufficient housing stock that is causing a constant rise in rental prices.
A trend that is growing in Spain
In Spain, we are still at an early stage. Consultancy CBRE calculates that 156 changes of use have been carried out over the last 10 years, and proof that the trend has intensified recently is that more than 70% of conversions took place between 2019 and 2023. In addition, 86% of operations are concentrated in Madrid and Barcelona, with “other cities where this phenomenon is also beginning to be observed, such as Seville, Bilbao, Cádiz and the Balearic Islands”, according to the firm.
The consultancy’s analysis concludes that around 224,000 square metres have been converted from offices to residential use over the last decade. Housing for sale is the most common product. However, other models are also included, such as rental, coliving and senior living.
But beyond the residential segment, office transformation is also looking towards the hotel sector. In fact, around 164,000 square metres of offices have been converted into hotels. Once again, a large share of these projects — 86% — are located in Madrid and Barcelona, although the phenomenon is beginning to spread to other cities such as Seville, Bilbao, Cádiz and the Balearic Islands.
An opportunity also for small investors
Small real estate investors are not unaware of this trend and are also incorporating this formula into their portfolios. A good example of this is the positive reception received by participatory financing projects developed by Urbanitae focused on office conversion:
- The García Lorca project, together with Grupo Abauco, consisted of the development of a new-build residential project in Seville on the floor of a building that, until then, had been used as offices. The total equity of the project amounted to 3,000,000 euros, of which Urbanitae investors contributed 62% — 1,870,000 euros — and the developer and one investor contributed the remaining 38% — 1,130,000 euros.
- The Doce de Octubre project was based on the transformation of a former bank office into four homes. The operation was led by Chapnik & Giesen, a leading company in property conversion.
