Asset Repurposing

New York is undergoing a complete metamorphosis. With an office occupancy from around 50% of pre-pandemic levels, the city is now transforming to a city that is built around pleasure. Around 56 million people visited New York last year for leisure purposes. Just as Calgary is looking to convert six million square feet of space to other non-office uses, such as residential, hotels, education, or performing arts venues.

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Asset repurposing in real estate has emerged as a strategic approach to transform underutilized properties into valuable and functional assets. With changing market dynamics, urbanization trends, and evolving societal needs, repurposing offers an opportunity to breathe new life into existing buildings and spaces, unlocking their potential for alternative uses. This innovative approach allows real estate developers, investors, and communities to adapt to shifting demands, maximize returns on investment, and contribute to sustainable urban development.

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Repurposing enables the transformation of outdated or underperforming buildings into vibrant, functional spaces that align with current market demands and community requirements. Moreover, asset repurposing contributes to sustainable development by optimizing existing resources and reducing environmental impact. Rather than demolishing and rebuilding from scratch, repurposing minimizes construction waste, energy consumption, and carbon emissions associated with new construction projects.

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There are a few drivers that are influencing this trend:

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Uncertainties about occupier demand: The adoption of hybrid working models will likely lead to a reduction in occupiers’ footprints. There is a shift towards more collaborative spaces and more health and wellness-centric buildings. This has also resulted in a compression of a building’s life cycle and an accelerated rate of obsolescence.

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Retail: The lack of return of footfall to stores after the pandemic is one of them. Some retail properties, especially those that were struggling before the pandemic, may never regain their pre-Covid revenue. Additionally, the lack of international travel has had devastating consequences.

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Tourism: International tourist arrivals in the APAC region have declined by 84% mid 2020. In the same year, tourist arrivals in Hong Kong and Singapore declined by 94% and 85%. Hotels naturally took the hit with significant declines of more than 50% in revenue per available room.

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Sustainability: Naturally, the ESG factor of repurposing instead of demolishing are attracting for investors.

Industrial: the boost in e-commerce consumption has increased the demand for logistics space and data centers. Additionally, the increased importance of life science (during pandemic) has increased the need for comprehensive biomedical manufacturing facilities.

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Officially converted

In the heart of big cities like London, New York, San Francisco or Toronto, office conversions can create hundreds of thousands of new apartments, creating more affordable housing.

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An increasing amount of vacant office space keeps hitting the market as companies rethink their real estate needs in the post-pandemic environment. In the third quarter of 2022, the national office vacancy rate in the US climbed above 15 percent, which is the highest level in 30 years. Tenants are still leasing space, but they are, quite frequently, leasing smaller spaces.

However, even though there has been a great deal of talk in the market about repurposing empty office spaces as a consequence of the pandemic-induced drop in occupancies, the actual number of completed conversions hasn’t increased that much over the last few years. On average, the U.S. recorded a total of 39 completed office conversion projects per year between 2017 and 2021.

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It does seem that the market has reached a turning point as of December 2022. As of then, 42 office conversions had reached completion and 217 were either underway or planned.

Mall-eable

Local governments across the US are converting unused strip centers and malls into housing or mixed-used developments, mainly to address the shortage of affordable housing.

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Brick-and-mortar retail becomes less and less popular, leaving malls and centers underused and eligible for a new use.

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The American Rescue Plan contained more than $65 billion in aid to cities, towns, and villages, to improve the cities and create more affordable housing. In some areas, legislation is helping the conversion of malls into housing. In California for example, a new set of modified or additional laws will enable a big increase of housing construction. The construction is estimated to grow from 80,000 to 10 million annually.

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Converting a failing mall into a housing development or mixed-use center can help cities attract new residents.

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