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Home working could drive Paris office vacancy rate to 12%

Office vacancies in Greater Paris, Europe’s largest market, could reach new highs by 2030 because of the working-from-home trend, according to a report published yesterday by Barclays.

In Q4, 2020 Greater Paris had a 6.3% vacancy rate, with 3.7 million sq m of vacant office space, far ahead of Central London at 1.7 million sq m. The Institut d’Epargne Financière calculates that within ten years the vacancy rate could reach 12%, an unprecedented level, with an additional 3.3 million sq m of empty offices.

Converting surplus offices into housing could be the environmentally-friendly solution to the problem and it would also help address the chronic housing shortage in the French capital.

It would be more sustainable than building new houses, halving greenhouse gas emissions and intensifying urban density, thereby limiting the use of greenfields and agricultural land.

Contractors would benefit and French REITs would take a more active role, according to Barclays, and the Parisian authorities are keen to encourage this type of conversion to create more homes. However, there are issues with availability and with profitability.

“Despite regulatory changes made to facilitate office conversions, the financial equation is not always balanced for investors, so landlords still prefer to keep buildings at their most valuable usage, which currently is office,” the report states.

High price of offices a barrier to residential transformation

Office-to-residential conversions tend to be more expensive than building new homes because office valuations are near record highs in Paris, so sourcing suitable real estate at a low price is extremely difficult.

Barclays analysts calculate that “at current office valuations, no conversion projects would break even on an average-to-heavy capex scenario, according to how heavily the structure of the office building needs to be modified”. At present, only light capex conversions are likely to be profitable.

However, things are likely to change soon. The market is undergoing structural change and the gap between office and resi rents and valuations is likely to close. Another factor is institutional investors’ increasing appetite for European residential, seen as a resilient asset class even during the pandemic.

“While the number of office conversions into housing is currently marginal compared to the level of new housing production, we believe the trend could accelerate in the next ten years as the Covid-19 crisis could be a catalyst for additional office space to be converted due to the rise of working from home,” says the report.

The Paris municipality expects a 20-25% decrease in demand for office space due to the remote working trend. The conversion of offices into residential has accelerated under the mandate of current Paris mayor Anne Hidalgo, of the Socialist party, with approximatively 50,000 sq m converted per annum on average over 2014-20.

However, Barclays points out that, “50,000 sq m only roughly accounts for 770 apartments of 65 sq m, which is marginal compared to the target of 50,000 apartments that are needed to alleviate the housing shortage in Paris”.