Conversion of Vacant London Office Stock Could Deliver 28,000 Homes to the Capital

- CBRE’s new Research strengthens the case for Office-to-Residential conversions in London 

New research from global real estate advisor, CBRE, estimates London’s current new homes pipeline could be exhausted in as little as six years – supporting the case for office-to-residential conversions. 

In its latest report ‘Office to Residential Conversion in London: The Opportunity & Challenge’, CBRE’s analysis of historic sales rates revealed the current stock of unsold homes in London could be absorbed in just two years. Applying this to the total pipeline of homes indicates an approximate lifespan of just six years’ worth of supply across the UK capital. 

However, converting existing office stock presents a key opportunity to boost much-needed housing and partly soften this shortfall. Central London has an office vacancy rate of circa 8.5%, representing around 20 million sq ft of empty space, and of this, approximately 16m sq ft is considered secondhand stock. This availability of second-hand stock, if converted, could equate to an estimated 28,000 homes delivered to the market. 

Scott Cabot, head of Residential Research at CBRE, said current market conditions are making conversion an even greater consideration for office owners. 

“The risk of stranded offices that no longer meet occupier needs or proposed regulatory requirements is pushing the repurposing of these assets to the forefront of investors’ minds, and we are already seeing some evidence of this. 

“Our data shows that between the start of 2022 and the end of May 2023, around £1.3bn worth of Central London office stock had been purchased with the intention of converting it to another use, and there’s more under offer. While only a small percentage of this stock has been allocated to residential use, it does highlight that investors are increasingly pursuing the opportunity to convert obsolete offices.” 

According to CBRE, smaller office buildings, which are typically more conducive to conversion, make up a substantial proportion of office stock, with 8.2m sq ft, or 40%, of Central London offices built since 1984 being smaller than 1,500 sq m – adhering to current Permitted Development Rights (PDR) legislation*. 

Since 2015/16, a total of 21,000 homes have been delivered through PDR and the conversion of smaller offices to residential use, with a further 9,000 homes in the current PDR pipeline. Many of these homes have been delivered in outer London boroughs, including Croydon, Hounslow, and Brent. 

The introduction of proposed MEES legislation will likely be another catalyst for the repurposing of office stock. Under the proposed regulation, commercial real estate buildings must have an EPC rating of at least B by 2030 to be leased. The expense of upgrading many secondary and tertiary offices could be prohibitively high, making conversion more attractive to investors. 

However, a series of planning, structural, and viability challenges in converting office buildings exist. This includes residential space standards, which not all office floors are able to accommodate. 

In London, most empty office spaces aren’t whole buildings, but instead are within a multi-tenanted office. As evidenced in the US market, a building needs to be predominantly vacant before converting becomes viable. Office stock within the Central Activities Zone in London is also highly protected from conversion. In addition, landlords must market the vacant space for at least 12 months before repurposing will be considered. 

Luke Mills, CBRE’s Residential Managing Director, noted Government intervention will be required to facilitate these conversions from a planning perspective. 

“London needs more homes and there is undoubtedly a growing amount of office stock that will need to be repurposed – so the opportunity to convert these offices to residential use is there. 

“The proposal to increase the size limit of PDR conversions is positive, but there are numerous challenges that mean larger conversion opportunities will struggle to move forward in the current environment. A review of London’s longstanding land use policy principals would be beneficial, and the planning system needs to further prioritise these conversions to unlock more opportunities.”