Investing in change

Abstract

This research investigates the financial feasibility of the design of new office buildings for future residential conversion in response to rising office vacancy rates (8%) and a housing shortage of approximately 400,500 homes in the Netherlands. Conversion is understood as the transformation of a building's function while preserving its structure, offering potential cost, time, and environmental benefits. However, the technical, functional, and legal challenges of converting existing buildings complicate their conversion. Although most buildings will require adaptation in the future, designing specifically for conversion remains uncommon due to financial uncertainties.
Existing research has explored the technical and functional aspects of convertible buildings, but little attention has been given to the financial feasibility of the design of buildings with future conversion potential. This gap limits investors' ability to assess whether convertible building designs offer financial advantages. This research aims to bridge that gap by evaluating the associated costs and benefits of the design of convertible buildings and their impact on financial feasibility.
The findings suggest that while convertible buildings require higher initial investments – due to enhanced structural features and design costs – they significantly lower long-term vacancy risks, improving rental income potential and allowing for favourable financing conditions. Sustainability benefits may also yield premiums that enhance property values and reduce tax liabilities, though their realisation is debated. The convertible design approach permits a lower discount rate, mitigating the time value of money effects on future cash flows. Financial feasibility does not solely depend on whether a building is converted; most factors remain relevant regardless of if the conversion actually takes place. The research concludes that designing for convertibility reduces long-term risks and enhances flexibility in adapting to market changes, though its financial feasibility varies based on market conditions and investor profiles.
This exploratory qualitative research contributes to filling a knowledge gap in the financial aspects of convertible building design, offering insights for investors, developers, and owners of office properties. It makes use of literature review, interviews with different stakeholders and a sensitivity analysis in form of a DCF model. The generalisability and validity of the findings may be limited because of its geographic focus on the Dutch market, the qualitative nature of data collection, and reliance on assumptions in the sensitivity analysis.