'It's A Big Ask': How Developers Should Approach Repurposing Offices Today

UK office occupiers’ flight to quality is presenting developers and investors with a dilemma: Should they attempt to refurbish an outdated office or repurpose it into another use?

This is not a new question, said Adam Jaffe, head of commercial real estate at Market Financial Solutions, as change of use has always happened. But what is new is the need for developers to really consider whether they can create the high-quality spaces occupiers have come to need. 

Zac Goodman, founder and CEO of asset manager and investor TSP, said it is up to developers to meet that challenge. 

“Today, it’s a big ask for a developer to produce an office,” Goodman said. “They used to just consider the envelope and hand it over, but now they have to think about the whole product through to operations. It’s a bigger commitment, but it potentially comes with much greater rewards.”

Bisnow spoke to Jaffe and Goodman to gain a lender’s and a developer’s views on what investors need to get right when repurposing real estate today. 

Bisnow: Is there still a trend to convert offices into other uses?

Adam Jaffe: There are certainly developers all over the country trying to create hotels, purpose-built student accommodation or coliving — whatever they think can extract value out of office buildings. That doesn’t necessarily mean it’s the right strategy to follow. 

It comes partly from the fact that the planning system and development are difficult and not likely to improve anytime soon. They find it’s easier to use existing structures to develop, rather than get permission for ground up. 

Zac Goodman: Since the pandemic, offices have gone into the “cores.” In main cities, what was originally considered core has become smaller and much more concentrated around transport hubs, and the long tail of offices now seems more fringe.

So for them to remain offices seems less commercially viable, and at the same time, there’s a structural need for housing. These offices are still located in commutable areas.

But this isn’t a new trend. Office conversion has ebbed and flowed over decades, particularly since permitted development rights changed in 2013. 

Bisnow: Are more investors looking to convert offices as a result of the pandemic?

Goodman: Before the pandemic, offices were already becoming more agile and there was already work-from-home. The pandemic provided a petri dish to test how to run a business outside the traditional office format at the extreme. 

But as life got back to normal, people started to measure the need to have people in the same place, to collaborate, build personal relationships and hear role models speak. Fundamentally, we still crave in-person experiences. 

What’s changed is that we’ve moved into wanting better-quality spaces.

Jaffe: And by “better,” that’s space that’s far more relevant to today’s occupational needs. This creates a level of happiness and mental health awareness, which is a trend that’s going to continue. 

Bisnow: How should a developer approach creating a better-quality workplace?

Jaffe: Today, the success of an office is how it makes you feel. When people leave their homes to visit the office, they will consider amenities, access to transport. 

The same amount of care is going into how investors decide to change the use of an office. The days of buying an office building and converting it into half-windowless, cheap residential space are gone. 

Developers are creating unbelievable coliving schemes that don’t resemble a converted office building at all. Because if you don’t create space people want to be in, you’re not going to get them occupied. 

Goodman: Good real estate, whether it’s coliving or office, sits at this nexus of good design and brilliant operations. The outcome is that people feel happy and productive. Why? Because it’s functioning for them.

People used to go to an office, work, use the microwave, go home at the end of the day. Now, they go at a variable time, sit in a breakout space, a meeting room, a phone booth, a kitchen and so on. Landlords have to design offices to cope with this variable, more chaotic demand. 

When I design an office, I consider how it will work. Why are we putting a meeting room there? How does it flow? What’s amazing is that customers know whether it will function at a subconscious level as soon as they walk in. 

An office needs to help a business be productive and attract both talent and clients. It nurtures the company’s culture and goals while helping with communication. It’s not just a case of asking a phenomenal architect to make a gorgeous building. 

Also, developers need to cope with how people are more health-conscious. This all adds to the de-densification of the office and the desire for higher levels of service, better-quality materials, efficient air conditioning and so on. 

Bisnow: How can a developer get to know the market for their asset?

Goodman: Product market fit is the whole shooting match. Developers must understand who their customers are going to be, what they want and what their product needs to deliver. This is new muscle that developers, investors and those who lend to and underwrite them have had to build in a very short time. 

Sometimes, investors and landlords become purely focused on one thing, at the expense of something else. They decide to create the most sustainable building in London, but people don’t care about that — they care that it is a sustainable building. 

So the investor hasn’t established a coherent product market fit. They might create something unique and disruptive, but that can increase the chances of it not working. 

Jaffe: From a lending perspective, when we consider developers, whether they’re planning to repurpose or refurbish, we make sure they know how to create space that tenants want. 

There’s no point backing companies who don’t understand how occupier demand varies within cities and sectors. What a tech company wants can be very different to what a law firm wants.

Bisnow: Do you think there’s more of a place for serviced offices in today’s market?

Goodman: I find that businesses of a certain size want their own front door. They don’t want to sit inside an operation that is overbranding them. 

Having said that, flexible workspaces provide an amazing service for small businesses, as well as large businesses that might need overflow, transition or project space. 

Serviced offices have been around for decades, but the market has been through the same restructuring as the office sector as a whole. Operators are heading towards more boutique space with extra services and a more thoughtful offering. 

Jaffe: We expect to get more approaches from borrowers who are looking to capture an uplift in rents by providing something that no other building in the area provides, which could be serviced offices. Perhaps by repurposing they will attract demand from businesses that downsized during Covid.

But as a lender, what’s in the building is less a focus. Our decision comes down to ensuring we back the right people who can deliver on their business plan. 

Bisnow: Should developers and investors be put off the office market by its higher demands?

Goodman: No, they just have to upskill to create a better product. People still need offices, which at the core are the same spaces as they have been for decades.

Amid all the changes going on, sometimes you need to zoom out and realise that even though there will be bumps in the road, such as disruption from AI or pandemics, people will always want to congregate in the same place and achieve things together. 

This article was produced in collaboration between Market Financial Solutions and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.