Demand for high quality and new space by office-based companies has presented a chance for savvy investors and landlords to give secondary quality buildings a new life.

And the focus has sharpened since the steady increase in unoccupied offices has also meant dropping rents.

Languishing B to D-grade offices are not going to lease in a hurry as the pandemic has prompted a shift to home-based work. This has left many landlords wondering about options for their under-utilised property.

In the Auckland and Wellington markets there is still a significant amount of secondary space and new, higher-quality offices are pushing it out of the office market.

Many believe these properties should be converted to housing as New Zealand still has a chronic shortage of owner-occupier and tenanted properties.

Conversion of older run-down commercial buildings into residential apartment blocks is not a new trend. It was initiated by Bayleys real estate agency in the 1990s and saved some inner-city buildings, such as the BNZ building in Victoria Street, Wellington, and the Madison building on St Patrick’s Square, Auckland, in a market that was facing a 30 per cent vacancy rate.

While the market is not facing the same bloodbath, it still needs to deal with the ravages of the pandemic, which has seen a sizeable shift of people unlikely to return to the office full-time.

As more second-grade buildings empty out they are becoming a magnet for conversion.

One commercial developer says it is far cheaper to convert an office building to residential than to build new.

Profitable Move

Conversions are much quicker to turn over, so the time from inception to completion is faster and therefore the return is much better. Put simply, conversions are more profitable than new builds. A 25 per cent return in two years is better than the same percentage return over three years.

But speed is dependent on the complexity of the conversion.

While commercial buildings well-suited to conversion often have unique characteristics, tend to be in prime locations, and have crucial infrastructure and transport hubs in place, says Pete Evans, Colliers International residential projects national director, it is not until a building is pulled back to its basic structure that a developer finds what is there.

One of the biggest challenges is tracking down the building’s original plans. While the structure and framework inform the design, another major issue is upgrading an old building to meet current building codes and standards. Crucially, this guides what developers and investors can do.

Existing commercial building floor plates are often deep, and typically a square. Apartment blocks are usually more rectangular, with a glass frontage and balconies key to their success.

“Any conversion is controlled by the bones of the building, and they often involve sophisticated design issues that need to be resolved,” says Evans.

‘Any conversion is controlled by the bones of the building’ Pete Evans

But there are significant benefits that come with conversions. One of these is that office buildings come with higher studs, often three metres, that are attractive for giving a sense of space.

“If a commercial building is viable for residential conversion, there are some savings to be made because slabs and lift cores can be kept and the rest is new construction,” Evans says.

One of the big advantages of repurposing buildings is it is more environmentally friendly than building from scratch. It avoids demolition, decreases the amount of carbon associated with new materials, and means less steel and concrete is needed.

Success Story

In downtown Auckland, The Cab, the long-empty and forlorn former Auckland City Council administration building, is a landmark 118-apartment conversion with a place in architectural history as the country’s first skyscraper, and will be right by the city rail link when completed. Apartments range in size from 56m2 to 600m2.

Other successful conversions are the Domain Collection at Carlton Gore Road, formerly Fidelity House, the long-standing headquarters of insurer Fidelity Life. It has 69 apartments, with one to three car parks per apartment, unencumbered park and city views and a secret garden connecting two buildings.

The old Fonterra headquarters on Princes Street in the CBD, now 90 apartments known as The International, is another success as is Lamont Brothers’ conversion of the old Winstone’s building on Khyber Pass into the SKHY apartments.

Many of the successful conversions are on Auckland’s ridges where big to small office buildings have good outlooks and the rear of the properties are not staring into the back of other office blocks, making them unattractive for conversion. Some of these poorer quality buildings have been successfully completed for student accommodation, particularly those with a lower stud, narrow footprint and few car parks.

However, many of Auckland’s smaller buildings were carved up into separate titles in the 1980s and 1990s for quick-flick developments, so much of the stock that could potentially be redeveloped into residential is off the table.

In Wellington there are several CBD office conversion projects in the works. Many of them are being done by The Wellington Company, which was a repurposing pioneer.

One of the company’s high-profile conversions of the former Freemasons building into the Te Kainga Aroha apartments on the CBD’s Willis Street is a joint project between the company and Wellington City Council. The council has taken the head lease on the completed apartments and initially rented them out at $410 for a one-bedroom apartment; $580 for two bedrooms; and $750 for three bedrooms.

The Wellington Company has also transformed the four-storey Trojan House in Manners St into 22 boutique apartments.

Because earthquake strengthening and seismic considerations are big concerns in the capital, if an office building needs extensive work it is worthwhile looking at the property more broadly and repurposing it as residential space.

As Wellington’s rental market is extremely tight there is demand for new supply and the compact nature and walkability of the city makes apartment living attractive.