Commercial real estate development can look like building a new facility from the ground up on a vacant parcel. It can also involve taking a current facility and making it into something more profitable. Those who own commercial real estate sometimes need to adjust their property management and investing practices to reflect changes in demand.
Office space was once a premium commodity. However, with the rise of work-from-home culture, fewer businesses need standalone office space to operate. Many companies have downsized or even outright eliminated their formal office environments.
Commercial property owners may find themselves struggling to lease office units even at discounted rates. Properties may sit vacant for months or years. Conversions can be very lucrative undertakings, but they can also end up failing due to complications and major expenses.
What types of challenges frequently arise when converting an office space into residential units?
Zoning challenges
Office buildings usually have commercial zoning or mixed-use zoning. Depending on the area, it may be necessary to rezone the building or obtain a zoning variance before converting the building from one purpose to another. Local municipal authorities and neighboring property owners may take issue with an attempt to change a building and potentially alter the overall characteristics of a neighborhood. It can take months to update zoning and can be a very expensive process.
The need for major building overhauls
What it takes for a multi-tenant commercial space to comply with building regulations is far different from the requirements for a multi-unit residential facility. A conversion may require installing new electrical supply or multiple separate HVAC units throughout the building. Demolition of parts of the building may be necessary to create code-compliant standalone units. The overall costs involved could be prohibitive in some cases.
Funding the conversion
Finding investors to pay for work on a building that does not currently generate revenue can be difficult. Even though demand for residential units is high and demand for office space is low, traditional loans may be hard to obtain. Commercial property owners may need to engage in creative financing, such as pre-selling units and offering custom finishes for those who acquire units in the building.
Trying to make the most of commercial properties can require outside advice from someone familiar with commercial real estate transactions and the many complications that could arise. Property owners trying to monetize currently unprofitable units may need to consider unique solutions, like converting a building, to recoup what they’ve invested in a property.