Why landlords are repurposing real estate

In London’s St Pancras area, Singaporean sovereign wealth fund GIC is converting the former headquarters of fashion label Ted Baker – a building nicknamed locally as the “Ugly Brown Building” – into laboratory space.

Macroeconomic factors are partly behind such changes. High interest rates, inflation and a sluggish trade recovery are keeping market conditions challenging, JLL’s research shows.

But there are other long-term factors at play, too. There’s a growing mindfulness among corporate leaders to offer environments that cater to a demanding workforce, leading to creative new ways to refurbish existing buildings. The evolution of city centers is also at play, with hybrid work and tourism influencing the shape of urban real estate.

With inflation falling and interest rates steady, stability is gradually returning to the market. JLL’s Q3 U.S. Office Outlook showed that U.S. office leasing in the third quarter of 2023 has outperformed the first quarter as large-scale leasing improves.

But not all offices are the same. For many investors, 2023 was a year of two halves for office assets. One side includes buildings near transport and amenities with strong sustainability credentials, health and wellbeing offerings, and both indoor and outdoor collaboration spaces.

The other group are the “have nots,” says Peterson. These buildings, lacking features that align them to what people and companies want, are where landlords are “starting the repair and transformation to meet the new demands of tenants based on the new world of work.”

Some of these buildings, especially those in the right locations, are being refurbished into modern offices. But the question for investors that own the office towers that don’t fit the bill is how to reposition or repurpose their assets altogether so they don’t become obsolete.

The conversion of unleased office space into residential units is also increasingly raised as a solution to a lack of affordable housing, which is a hot-topic item around the developed world. The U.S. has less housing for sale or rent than at any time in the past 30 years, according to Moody’s Analytics. Ninety percent of global real estate investors anticipate converting U.S. offices into residential assets, says an Association of International Real Estate Investors survey.

Investors are also considering conversions to industrial storage and data centres (72%), hospitality and leisure (69%), and vertical farming (33%).

In the U.S., the 15-story Union Bank Tower, a 54-year-old office building in Portland, Oregon, is being sold for repurposing into a data center.

In Hong Kong, a cold storage facility is being converted into a 40-megawatt data center. The construction for a new data center can take up to 26 months, and that excludes the permitting process, says Chris Street, managing director of data centers, Asia Pacific, JLL. But the types of conversion investors are currently pursuing usually take only around one year to complete.