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Converting Office Buildings into Residential Units: A Solution to Poland’s Housing Shortage?

REAL ESTATEConverting Office Buildings into Residential Units: A Solution to Poland's Housing Shortage?

In the USA and Western Europe, there’s an increasing number of projects associated with converting office spaces into residential ones. In Poland, these are still few and far between. “The lack of incentives to transform unprofitable office buildings into apartments effectively blocks many investments. We prefer to demolish these buildings rather than remodel – the question is whether our society can afford this” – Says Dr. Jan Gąsiorowski, an associate at the Warsaw office of Wolf Theiss.

The transformation of office buildings into residential ones in the USA or Canada is widely discussed and increasingly carried out by local investors. The conditions leading to such modifications are similar to those observed in Poland – rising interest rates and the pandemic have led to a sharp increase in the number of commercial loans and vacancies, especially in older office buildings offering less prestigious locations and fewer amenities.

“The vacancy rate in the USA or Canada is quite similar to the market in Poland. According to CBRE, the vacancy rate for office spaces in Manhattan in May was 15%. For comparison, in Poland, the vacancy rate in major regional office markets has been growing since the second quarter of 2022 and reached 17.3% at the end of the third quarter of 2023” – emphasizes Dr. Jan Gąsiorowski.

As the expert notes, there is a boom in the construction of new offices in many large centers across the ocean, as larger companies move to buildings offering modern space, numerous amenities, and solutions compatible with ESG strategies. This leads to a decline in the quality of office space in city centers, along with a deficit of residential properties. Therefore, the natural step should be the conversion of office buildings into residential ones – as a cheaper, simpler solution. However, such conversion is difficult due to regulatory and financial obstacles.

“Many local authorities in the USA and Canada are inclined to prepare incentives for companies, thanks to which the conversion of office spaces into residential ones becomes more friendly and feasible for investors. This avoids costly and troublesome demolitions in city centers, which along with the new constructions generate significantly more CO2 emissions than converting existing buildings” – notes Dr. Jan Gąsiorowski.

Calgary, Canada is a leader in such conversions. Meanwhile, authorities in San Francisco are trying to adjust the current building regulations to the needs of such transformations, and the mayor of Washington wants to allocate significant resources to a tax relief program to support such transformations. There are also talks about the plans of the Mayor of New York who is pushing for changes in regulations related to spatial planning, allowing the industrial zone in downtown Manhattan to also be used for residential space.

A similar situation is observed in Germany, where the deficit of housing is increasingly felt. According to JLL experts, conversions of office spaces into residential ones have not played a significant role in the local market up till now, but changes are already visible. Experts calculated that in Frankfurt the number of conversions increased more than twofold over the last 15 years and vacant office space in seven major cities has the potential to transform vacancies into 20,000 homes by 2025. This corresponds to approximately 40% of the demand for residential space in metropolises, which will arise in the next two years.

In the meantime, Poland struggles with a painful housing deficit, and the number of conversions of office spaces into residential ones 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 undertake spectacular renovations, for example, in districts traditionally associated with office buildings. An example of such a trend could be the sale of the Obrzeżna Center office building by the Octava Fund to an investor who intends to remodel it and change its function to residential. The Obrzeżna Center is a building located at the main intersection of the Mokotów Business Area – colloquially called Mordor by the residents of Warsaw.

“Many office properties in Poland, especially older ones, like in the USA or Germany, are in a very difficult economic situation. The sale of such assets often means the building’s liquidation. You can see this in the large number of demolitions that can be observed in the centers of Polish cities recently” – explains Dr. Jan Gąsiorowski.

For example, Atrium International is disappearing from the landscape of Warsaw and Empark Mokotów Business Park is to be radically rebuilt. The same is happening in every bigger city in Poland. In Krakow, Plaza mall is disappearing, and in Wrocław, the Impel office building. Specialists also point out that there are no incentives, either financial or regulatory, to transforming and remodeling existing projects. On August 16, 2022, the Ministry of Development and Technology published a draft law on changing the usage of some non-residential buildings to residential ones, which was later renamed the draft law on changing the Building Law Act and the Flourishing Accommodation Development Act. The conversion according to the project was to be implemented without the need for a construction permit, with the exception of the building’s structural elements. One of the project’s flaws, which was supposed to be accepted by the Council of Ministers in the third quarter of 2023, was the limited time frame within which conversions could be carried out. This was to happen only within 2 years from the entrance of the regulations into force. Additionally, provisions were included in the project, according to which the municipality would receive an preferential offer to purchase apartments or residential buildings corresponding to at least 5% of the total investment area, which would significantly increase the cost of such a conversion. Currently, there are no announcements regarding the further fate of these regulations.

“The lack of regulations stimulating the conversion of office spaces into residential ones puts such ambitious and interesting projects in a difficult situation. Currently, investors can only use the regulations and procedures within the so-called lex developer, which does not always promote conversion as a desirable direction of remodeling. The example from across the ocean, where we have both tax and legal incentives, is an interesting direction that allows local authorities to effectively influence urban space. Appropriate regulations dedicated to converting office buildings into residential ones can increase the number of such projects carried out on the Polish market and thereby ensure a significant increase in available housing space in the largest cities in Poland” – summarized Dr. Jan Gąsiorowski.

According to JLL calculations on the German market, the costs of converting offices into residential spaces in the major cities are on average almost 50% less than in the case of new buildings, despite the various challenges associated with the construction and adjustment of such buildings. In addition, CO2 emissions are significantly lower in the case of renovations. According to the latest research, buildings account for 38% of global CO2 emissions, of which 28% comes from the operation of buildings, and the remaining 10% is caused by the energy consumption needed to produce materials and technologies used in construction.

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