Converting Your Commercial Property: How to Retain Value in a Difficult Environment

December 10, 2020

With the inevitable economic downturn of COVID-19 still unfolding in New Zealand, commercial property owners are being forced to consider their strategy for retention and future occupation of their office buildings, while grappling with minimising overheads and maximising the yield of their assets. Prendos Senior Building Surveyor and Project Manager Leon Goodwin explores one way in which investors can pivot to retain the value in their properties.

The challenges presented by the ongoing pandemic have had an unprecedented impact on the economy and the way businesses operate. As some reduce staff numbers and others encourage their employees to work from home, one likely outcome will be a rise in the offloading of office and retail space across the country. A recent research report by Colliers International, The Future of the Office Space, analyses trends across the Asia Pacific region emerging as a result of the COVID-19 pandemic – including in Auckland’s CBD.

Leon Goodwin - Chartered + Registered Building Surveyor
Leon Goodwin – Chartered + Registered Building Surveyor

The report forecasts that office vacancy rates will peak around late 2022 at around 14%, although indicates that this peak may occur slightly earlier in Auckland and reach only around 11%. This is likely to result in increased office vacancy rates, which may in turn drag rents down. The landscape of city centres across the world is changing – and New Zealand is no exception.

The increase of remote working is one notable outcome of the pandemic. Flexible working practices were already being promoted by New Zealand businesses before the first lockdown, but this has increased exponentially since April 2020. While for many people this may only mean working from home one or two days a week, the cumulative effect will be a drastically reduced need for large offices, as employers seek more flexible working spaces that can adapt to ever-changing office based staff numbers.

While the businesses downsizing their office footprint will reap the rewards of reduced overheads, there may also be a potentially positive option for property owners and prospective investors: converting commercial or retail spaces into sought-after high-density residential housing.

The Growing Demand for Housing

New Zealand has had a longstanding housing shortage, particularly in our largest cities. The ever-increasing housing demand is coupled with a clear intention from councils to intensify housing in CBD areas. It presents a unique opportunity for investors or owners of commercial property to convert office space into residential units – hopefully realising a greater return in the process.

The conversion of offices into residential units is a trend that’s been unfolding in the UK and Europe for a number of years, and is likely to increase as lockdowns continue and permitted development rights are further relaxed to address the need for more housing. Two of the most high profile examples in London were the conversion of the iconic television centre in White City and ‘Delta Point’ development in Croydon, South London, where 29,000sqm of office space was converted into 348 new homes.

It’s also something we’re starting to see on New Zealand shores, with one large conversion recently announced at the former TVNZ base in Avalon – where the ten storey tower is being turned into 68 apartments. We’re likely to see more of these projects across our main cities, and it could be a welcome change. Not only will it provide much needed housing in areas of high demand across the country, particularly in CBD locations, but it will give commercial property owners the respite they need from decreased tenant demand and reduced commercial rents.

What’s Involved in Converting a Commercial Property?

As with any major change, there are a number of things to consider on the path to success – and it starts with doing your homework.

The first (and most obvious) question is whether your commercial space actually allows for a quality living environment – one that is both desirable to potential residents and yields a profit. The fact is that not every office or retail space is suitable for conversion and, even when a space is suitable, there will still be a number of practical issues to overcome. Most office and retail spaces have been designed for their original intended use, not to be used as a living environment. This means careful consideration must be given to natural light, adequate ventilation, quality finishes and whether you have the room required to provide decent sized living spaces.

The second thing to look at is whether there are any local planning restrictions that may prevent development. For example, some locations have covenants preventing residential dwellings, while others are not currently zoned for residential use. You also need to investigate whether the property’s existing utilities will provide sufficient output to supply multiple dwellings rather than one large office space. Plus, it pays to check the Resource Management Act (which covers any intended change of use for a property) for any potential barriers.

In order to realise the greatest profit, it’s also important to assess the potential of the building and the site. You need to understand what is possible in terms of expansion or repurposing – and, more importantly, what this might cost you. Could you add a rooftop development? Are you able to extend the building within the boundary to allow for additional units? Or how can you best maximise the existing fabric of the building to minimise structural changes?

The Importance of Using a Qualified Property Consultant

These considerations are just the tip of the iceberg, and will undoubtedly seem daunting to most owners or investors! At the end of the day, as with all projects, the outcome will only ever be as good as those leading the job – and that’s where an experienced building surveyor comes in.

As one of New Zealand’s most respected property consultancy companies, Prendos has over 30 years’ experience across all aspects of property refurbishment, new build, conversion and professional services. Our building surveyors can help you investigate the potential of your property, understand the hurdles to overcome, and assess your options to discover the best way forward. We know how to unlock the potential value of any building while sticking within the confines of the council and RMA. What’s more, we will always be bold enough to state when a site is not suitable, or to suggest an alternative when we believe the proposed plan will not result in a quality outcome. What you don’t want to do is increase the amount of poorly converted properties already in the market!

The great thing is that our building surveyors are also skilled project managers, so we can take your project from investigation through construction to successful completion. Plus, because we’re a truly multidisciplinary organisation, we offer many of the services required for projects of this nature in-house – from Architecture and Building Surveying to Structural Engineering, Quantity Surveying and Quality Control Inspections.

So, if you’re a landlord, investor or commercial property owner wanting to future proof your investment, give us a call. It doesn’t hurt to explore your options – especially in such an uncertain economic environment. Change doesn’t have to be negative, and we certainly believe there are ways to pivot and adapt your investment to suit the new property landscape.

Leon Goodwin at the NZIBS Awards 2020

Leon Goodwin recently received the New Zealand Institute of Building Surveyors (NZIBS) Excellence Award, which recognises excellent and sustainable results across all areas of building surveying. The award recognised Leon’s efforts on the remediation of St Pauls Apartments in Wellington’s CBD, where he acted as Project Manager, Building Surveyor and Technical Advisor to deliver a building that met best practice standards and exceeded client expectations.

Office to Residential Conversion: Things to Consider

There are a number of key considerations when investigating the suitability of a building conversion. If you want to create high quality homes that are beneficial to all stakeholders, there are some important factors that will put you on the path to success.

  • Does the space allow for quality living conditions? Does it provide decent sized living spaces and offer natural light and ventilation?
  • Does the clear span of the building allow for the internal alterations required to create residential properties of appropriate sizes, proportions and space standards?
  • Are there any local planning restrictions that may prevent development?
  • Do existing utilities provide sufficient output to supply multiple properties rather than one large office space? Is there appropriate drainage to support multiple units without impeding the layout? Retaining the existing utilities and drainage setup would allow you to significantly minimise build costs.
  • How can you maximise the existing fabric and minimise structural change? This is crucial to profitability.
  • Have you investigated the potential of the site? It’s important to understand the plausibility of extending the building within the boundary to allow for additional units. Remember to pay careful consideration to parking arrangements.
  • Have you considered adding a roof top development under a separate planning application? This will allow a greater number of spacious units to be created.
  • What sustainable materials and technologies can you incorporate to reduce the energy use and carbon footprint? This is an essential consideration, as the building was not intended for residential use. A ‘fabric first’ approach is key while ensuring the usable floor area is not impacted.

Prendos has offices across New Zealand, so wherever your property is based we’re happy to discuss your conversion options – no matter how far down the track you are in your planning. Contact us on 0800 PRENDOS or email [email protected].

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