Bouygues Immobilier

Sebastien Hoepffner

In recent years, the French real estate industry, like many real estate industries throughout the planet, has been focused on building offices. In city centers and their vicinities, this asset class was the most profitable as investors had financialized the product and were only buying it for its yield and secured income stream.

Ever since central banks began raising interest rates in 2022, this paradigm has rapidly been questioned by real estate professionals. Usual investors have decreased or even completely stopped their capital allocation towards offices or real estate as a whole as they are able to achieve similar yields on more liquid investments. This shift in investor policy has forced real estate professionals to adapt and change their behavior.

Parallel to this, and since the Covid-19 crisis, the office need for occupiers has reduced. More and more companies are allowing their employees to work from home and, as a result, office take-up shrunk. Either occupiers reduced their office footprint on their current building, or they moved to another smaller office building, often with a better location. With smaller surface needs, occupiers have been able to pay higher rents in city centers, thus helping them attract talent in their organization. This resulted in a disaffection of secondary markets, where office vacancies quickly rose.

These two phenomena combined led the office sector to suffer from both a lack of occupiers leasing the buildings and investors buying the assets. 

With more and more office assets becoming vacant - for probably a long period of time – real estate professionals had to look for other ways to create value. The obvious solution was to transform these obsolete assets into residential condos or serviced apartments. Demand is always strong as France is chronically lacking residential units – over 500 000 apartments per year are needed.

A lot of professionals, both real estate developers, and investors are now seeking aging office buildings in secondary locations to transform them into residential use. In France, it is considered that up to 15% of the office stock (i.e., ~8 million sqm) might be ripe for conversion. However, the potential value unlocked with this mechanism is not as straightforward as one may think.

Several difficulties can arise: (i) some office assets are not technically convertible (too large, unusual shape), (ii) conversion needs cheap land prices, and the vast majority of office landlords are still unwilling to sell their position at a loss and (iii) some city councils are politically not interested in allowing asset transformation as creating residential units necessarily implies the creation of public amenities (landscaped areas, schools or gyms).

In conclusion, it is now an accepted reality that the office sector needs to change and adapt to its current environment, and asset conversion is often the best solution to create value and liquidity. Real estate professionals need to navigate between finding an adequate asset and selling it at the right market value in a city where change is acceptable. Even with all those hurdles, asset conversion is undoubtedly a theme in the era of time and one of the largest development windfalls of the next decade.