London Office-to-Residential Conversions: Opportunities and Challenges

The BT (British Telecom) office building — Delta Point, in Croydon, London — once appeared as Gotham General Hospital in *The Dark Knight Rises*. Today, over a thousand people sleep there every night.

This isn’t a film sequel — the office building has actually been converted into a 404-apartment residential block, and has become a landmark example of London office-to-residential conversion.

In recent years, more and more London office buildings have been converted into homes. What’s driving this? CBRE has analysed the deeper forces behind this specific phenomenon in depth, and published a major report, *London Offices Converting to Homes: Opportunities and Challenges*.

Report Highlights

1. London’s severe housing shortage is the main driver of conversions

• New housing supply has failed to keep up with demand, with a cumulative shortfall of 90,000 homes over the past decade, and a shortfall of more than 150,000 forecast by 2025.
• New housing applications are currently at their lowest level since 2010; application numbers in the first half of 2023 hit a record low, 40% below the previous trough.
• CBRE forecasts that around 20,000 homes a year will be delivered between 2023 and 2025 — only 60% of the target figure.
• London’s current housing stock is expected to sell out within two years; including homes already approved but not yet built, new supply is estimated to last only around six years.

2. Office-to-residential conversion carries both opportunity and challenge

• The spread of hybrid working and higher energy-efficiency requirements are forcing some office buildings to convert.
• Central London office vacancy recently stood at 5%, more than double the pre-pandemic level.
• The conversion outlook is promising — existing vacant secondhand office space could currently be converted into close to 80,000 homes.
• The government has already introduced incentives such as Permitted Development Rights (PDR) for office conversions.
• Challenges remain, including complex ownership, building structure, regulatory restrictions and economic viability.

3. These areas are worth watching

• Over the past three years, Lewisham, Kingston upon Thames, Redbridge, Havering and Bromley have each built fewer than half of their targeted new homes.
• CBRE estimates that Kingston upon Thames, Sutton and the City of London will sell out of new homes within three years.

The Housing Shortage Is Creating Big Opportunities for Office Conversions

Logically, London — a millennia-old commercial capital packed with companies — should have strong demand for office space. So why has office conversion become such a widespread trend in recent years?

After analysing a large amount of data, CBRE found the driving force lies behind the numbers: London simply doesn’t have enough homes. New housing delivery has consistently failed to meet the government’s own targets, and supply has never been able to keep pace with demand.

According to figures from the Department for Levelling Up, Housing and Communities (DLUHC), London delivered a net 322,000 homes over the past decade. But demand over the same period required 413,000 homes, leaving a shortfall of around 90,000.

The pipeline of housing currently in planning is worse still, which means the shortage will only get tighter in future.

Molior, a leading housing-development research body, says London’s new-housing applications have fallen to their lowest level since 2010. In particular, application numbers in the first half of 2023 hit a record low, down 60% year on year. Planning permissions granted in the first half of 2023 also fell by 50% year on year.

CBRE forecasts that around 32,000 homes a year will be delivered between 2023 and 2025, only 60% of London’s planned target. Between 2012 and 2025, the cumulative shortfall is expected to exceed 150,000 homes.

Under this supply shortage, London homes are in high demand, and sell extremely quickly.

CBRE’s analysis shows that current housing stock is expected to sell out within two years; including homes already approved but awaiting construction, new homes across London are expected to sell out within around six years.

Office-to-Residential Conversion Offers Plenty of Opportunity

Unlike the fierce demand for housing, the office market has faced starkly different fortunes in recent years, pushing a number of office owners to look at conversion to residential use as an opportunity.

First, several factors are pushing owners to consider converting their office buildings.

First, more office users are focused on sustainability, and some older office buildings have fallen out of favour. CBRE’s 2023 occupier survey found that 55% of respondents consider sustainability the single most important factor when choosing office space — rising to 64% among large companies.

Second, the pandemic made hybrid working increasingly popular, squeezing office utilisation. CBRE’s recent European occupier survey found the preferred working model is an even split between remote and in-office work. CBRE’s Global Live-Work survey also found that nearly two-thirds of UK employees prefer a hybrid working arrangement, leaving some office buildings empty for long stretches. According to CBRE data, central London office vacancy in the second quarter of 2023 stood at 8.5%, more than double the pre-pandemic level at the end of 2019.

Third, new regulations are also forcing some offices to convert. Draft Minimum Energy Efficiency Standards (MEES) would require all commercial buildings to reach at least an EPC B rating by 2030, and a C rating by 2027 to remain lettable.

Currently, around 90% of office buildings in England and Wales have an EPC rating below B. In central London, the proportion is even lower, at around 85% — equivalent to 166 million square feet of office space that fails to meet the standard. The cost of upgrading buildings that fail to meet the standard could be enough to make many owners think twice.

CBRE estimates that upgrading central London office leases expiring between now and 2027 will cost nearly £370 million. This covers only around 7% of non-compliant office space — upgrading every non-compliant office building in central London could cost more than £5 billion. With offices struggling and upgrades costing money, owners naturally have to weigh up what to do with the building afterwards.

Second, in a London short of housing, converting offices into residential space is popular with both the market and consumers.

In CBRE’s 2023 UK Investor Intentions survey, nearly a third of respondents said residential property was their main investment target, well ahead of any other property type. Scott Cabot, CBRE’s Head of Residential Research, said current market conditions have made office conversion a leading consideration for office owners. He noted: “From the start of 2022 to the end of May 2023, London central office stock worth around £1.3 billion has already been acquired with the intention of converting it to other uses, and more is up for sale.”

Finally, the government has also given office conversions the green light.

Converting long-vacant office buildings can revitalise communities, and is more environmentally friendly than demolition and rebuilding. As a result, it has received strong government support. In 2013, the government introduced Permitted Development Rights (PDR) rules, allowing any commercial building of up to 1,500 square metres to change use without prior planning permission — making conversion faster, easier and cheaper, and significantly boosting conversions of smaller office buildings.

Since 2015, 21,000 homes have been delivered in London through PDR conversions, equivalent to 8% of all new homes added over that period. To further encourage office conversions, the government has doubled the PDR floor-area limit to 3,000 square metres, putting this “fast lane” for conversion within reach of even more office buildings.

Challenges to Conversion Remain

Although office-to-residential conversion has a promising outlook, plenty of challenges remain, and London’s housing shortage is unlikely to ease in the short term.

First, office ownership is complex. Most buildings have multiple owners and multiple tenants; part of a building being vacant does not mean the whole building is vacant, which makes conversion harder.

Second, some office buildings are inherently unsuited to conversion. Residential use has specific requirements for ventilation and natural light; some office buildings are too deep-plan to give every residential unit enough light and air. Some office structures don’t meet residential “load” requirements, and plumbing and heating systems can be difficult to upgrade.

Third, regulation and planning still present obstacles. Current policy requires an office building to be marketed for sale for at least 12 months, and remain vacant, before its use can be changed. Some areas, such as Camden and Tower Hamlets, require 24 months of vacancy before conversion is allowed, significantly increasing the cost and difficulty of converting offices to residential use.

Fourth, economic viability is also a challenge. Generally, commercial-use buildings are worth more than residential ones. Although central London office values have fallen around 15% from their 2022 peak, a gap still remains. This is also why nearly two-thirds of office-to-residential conversions are currently concentrated on the outskirts of London.

Finally, many London office buildings are held as investments by owners who are not based in the UK. Since 2012, an average of 70% of central London office investment has come from overseas. These owners and investors may be unfamiliar with the regulations and processes involved in conversion. Without a local team, successful conversion can be difficult.

Successful Conversions, and Areas to Watch

There are plenty of successful examples of London office-to-residential conversion. Beyond the Delta Point building that appeared in *The Dark Knight Rises*, there is also Westbourne Grove — a Grade II listed former Victorian-era police station converted in the heart of the city — and Beau House in St James’s. Beau House’s conversion drew inspiration from one of menswear’s most famous figures, Beau Brummell, whose statue sits on the same street, Jermyn Street, as the project. The converted building offers eight elegant, comfortable luxury apartments, popular with high-end buyers.

A recent example of strong sales is Kingmaker House in Barnet, near the new Barnet train station and within easy reach of central London, offering 137 apartments after conversion. Part of the project’s success came from targeting the build-to-rent market — it was fully let within just six weeks.

Molior’s figures show build-to-rent now accounts for half of all homes converted through PDR so far. CBRE’s UK Investor Intentions survey also found that among respondents planning to buy residential property, nearly 75% said build-to-rent was their target asset class. Letting out converted office buildings is clearly one of the emerging trends.

As for location, some areas facing a severe housing shortfall are worth watching.

Over the past three years, only six London boroughs have met or exceeded their new-housing targets. Other boroughs — particularly Lewisham, Kingston upon Thames, Redbridge, Havering and Bromley — have built fewer than half of their targets.

CBRE estimates that Redbridge, Kensington & Chelsea and Enfield have relatively larger new-housing supply, while Kingston upon Thames, Sutton and the City of London have only enough new homes to last around three years — worth keeping an eye on.

Luke Mills, CBRE’s Managing Director of Residential, said: “There’s no question London needs more housing, and more and more office buildings need repurposing. That’s exactly where the opportunity for converting offices to residential use comes in.”

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