Credit: PexelsRethinking Spaces with Deepki - Examining the rise of Hybrid Real Estate Models
Insights from Deepki on why adaptive reuse of commercial spaces is crucial for urban resilience and investor returns
February 21, 2025Real Estate
Written by Hélène Lecointre
A study published in December 2024 by the Consortium des Bureaux en France (CBF) revealed that nearly 1 million square metres of offices in Paris have been vacant for over 2 years, reflecting a global trend. Major cities have reported similar behaviors, such as New York City, where the office market recorded a 23.5% vacancy rate for Q3 2024 in Manhattan.
These figures highlight a significant shift. The Covid-19 pandemic and the rise of remote work have profoundly impacted where people live, work, and shop.
“Real estate in the world’s superstar cities has not kept up with shifts in behavior caused by the pandemic. The cities’ vibrancy is at risk, and they will have to adapt.” (McKinsey Global Institute, July 2023)
In response to this new reality, real estate players started adopting and implementing hybrid solutions, diversifying the functions of buildings beyond a single use.
This article explores the current hybrid practices in real estate, their impacts, and the challenges they pose to the industry.
These transformations can occur at any stage in a building lifecycle and usually address pressing real estate challenges. A typical example is converting vacant offices into housing, which is gaining traction in cities facing significant housing shortages. It could help meet growing housing demand and represent a sustainable solution.
For instance, the city of Paris started adopting hybrid strategies and has launched several innovative projects. One such project is Morland Mixité Capitale, a former police prefecture transformed into a mixed-use space featuring a hotel, youth hostel, swimming pool, art gallery, restaurants, shops, etc. Delivered in 2022, the project has earned multiple labels and certifications, including BREEAM - a certification that assesses the sustainability of buildings across various categories.
Converting existing spaces rather than constructing new buildings is a strategic choice for investors and property owners. It helps the real estate sector adopt sustainable practices to achieve net-zero targets and address climate urgency. Refurbished buildings that undergo a use change, typically incorporate sustainable materials and practices, enhancing both resiliency and long-term value. This approach helps prevent assets from becoming stranded or subject to brown discounting. Additionally, it makes them more attractive to investors as resilient, future-proof properties.
From offices to housing
While the office sector faces a significant decline with higher vacancy rates, residential assets have shown resilience and growth in recent years. Therefore, investors are increasingly drawn to the potential of residential properties.
The most widely adopted approach to date has been converting offices into housing, as major cities worldwide face significant housing crises. Office spaces offer ample opportunities to create apartments, addressing the growing demand for residential units while revitalizing deserted business districts.
From offices to student and senior residences
This approach could provide the housing needs of both students and seniors, reflecting shifting demographic trends. In Europe, student housing has shown remarkable resiliency, with growing demand and interest from investors for student accommodation. At the same time, the aging population (the EU’s aging population continues to rise, with Germany and France seeing their over-80 demographics increase by 2.4 million and 3 million in the next 20 years) has made senior living into a promising and demanding segment.
From offices to data centres
Empty office spaces could also be repurposed as data centres. The growing demand for data storage makes transforming offices into data centres increasingly viable, as these facilities require large, open spaces.
From offices to hotel stock
Another option is converting office spaces into hotels. Their central locations make them ideal for attracting both tourists and business travelers. For example, in London, there has been a growing trend in recent years of repurposing office buildings into hotels. These transformations that could maximize occupancy rates and profitability.
From offices to leisure facilities
Transforming vacant office spaces into leisure and recreational facilities, such as gyms, cinemas, or cultural centres is another strategy. These conversions offer an opportunity to enhance services in urban areas and improve the overall well-being of residents.
On a simpler level, some buildings are now being designed to accommodate different types of workspaces or office arrangements. This practice offers the flexibility businesses require in a world where work dynamics are increasingly versatile.
Another approach includes mixed-use neighborhoods. This means diversifying areas traditionally dominated by a single real estate segment, like offices, by combining a mix of office, residential, and retail space.
Whether applied to buildings or neighborhoods, this mixed-used approach can improve the financial performance of portfolios while enhancing resiliency and providing investors, developers, and cities more incentive to invest in them.
Technical and legal challenges
One of the main challenges is technical, as the structural differences between buildings can vary significantly. Converting offices into housing requires substantial changes. This includes, for instance, improvements to soundproofing, reorganization of layouts, and the division of large spaces into smaller residential units. A thorough assessment is necessary to determine whether such a transformation is possible and economically viable.
Furthermore, converting spaces often requires a change in the building purpose, which needs to be approved by the concerned authorities. Navigating this approval process can be complex, time-consuming, and an economic burden.
Here’s an overview of how different countries approach hybrid real estate strategies:
France
To convert offices into residential units in France, investors must secure a building permit while adhering to the local urban plan (Plan Local d’Urbanisme, PLU in French). Additionally, the RE2020 regulation requires compliance with stringent environmental standards when doing major renovations and/or new constructions. These strict regulations significantly impact renovation costs and often deter investors from converting spaces.
However, the French government is increasingly supporting these initiatives through various incentives. Recently, a proposed bill seeks to simplify the conversion of non-residential buildings into housing by addressing regulatory and administrative barriers. This includes introducing a “reversible” building permit to streamline the process and encourage more adaptive reuse of existing spaces.
UK
Since 2013, England’s “permitted development rights” (PDR) have permitted the delivery of around 121,000 flats. Introduced to address the severe housing crisis, PDR was designed to allow developers to convert commercial buildings into residential units without full planning consent. While this policy has improved housing delivery, a 2018 RICS study revealed significant gaps in housing (size, amenity space, location, etc.). PDR is now a subject of debate and it might disappear in the future to be replaced by other government initiatives.
While simplifying processes is essential to encourage space conversions, guidelines must ensure that new housing meets quality standards. Furthermore, investors must consider climate risks, such as rising temperatures and heat waves in the UK. Poorly designed buildings not only increase vulnerability but also jeopardize long-term value and profitability.
US
In the US, zoning laws represent a significant constraint. While they vary by region, they dictate how properties can be used within a particular area. This typically prohibits residential uses and developments in commercially zoned areas. As a result, converting spaces can become a lengthy, expensive, and complex process, discouraging investors and property owners.
However, in recent years, local governments have been working to address this issue. New laws to change zoning rules have been introduced in various States to support more housing development and tackle the ongoing housing crisis.
Read more: The US approach to ESG compliance in real estate
Financing
Another significant challenge is financing, as the transformation needs to be profitable for investors. Stakeholders must carefully consider certain factors, such as the purchase or lease of buildings, the conversion costs, and the revenues these conversions will turn into.
Securing financing for such conversions can be complex, primarily as investors must ensure that the gap between the upfront costs and future revenues remains bearable. The decision to reinvest in CapEx for renovations versus pursuing a more comprehensive conversion strategy should be carefully addressed.
A key factor is the rent price difference between office spaces and housing. It helps determine the economic viability of the project. Several other elements influence rent rates, such as current market conditions, the building’s structure, location, and class. If the rent for office space significantly outpaces residential rents, owners may determine that converting to housing isn’t financially profitable.
However, conversions can offer potentially more significant returns, especially in areas with high housing demand and a high office vacancy rate. For example, a 2023 Deloitte study on the US market projected that by 2027, changes in rent prices, valuations, acquisition costs, conversion expenses, and additional government incentives could enable developers to achieve profitable returns from converting office spaces into residential units.
Yet adopting hybrid practices will take time, as it poses challenges. The costs associated with building conversions, navigating zoning and legal requirements, and securing financing can be considerable. On top of that, hybrid spaces are bound to stringent ESG regulations, which real estate players must carefully navigate.
Therefore, prioritizing action plans and investments can prove difficult. At Deepki, we are committed to helping real estate investors and owners build comprehensive action plans and outline key steps to safeguard your portfolio value. We provide our deep expertise and end-to-end platform, essential tools to ensure your compliance with major regulatory standards, maximize long-term portfolio value in the ever-evolving real estate market, and guarantee strong resilience.
This article originally appeared on Deepki.com
A study published in December 2024 by the Consortium des Bureaux en France (CBF) revealed that nearly 1 million square metres of offices in Paris have been vacant for over 2 years, reflecting a global trend. Major cities have reported similar behaviors, such as New York City, where the office market recorded a 23.5% vacancy rate for Q3 2024 in Manhattan.
These figures highlight a significant shift. The Covid-19 pandemic and the rise of remote work have profoundly impacted where people live, work, and shop.
“Real estate in the world’s superstar cities has not kept up with shifts in behavior caused by the pandemic. The cities’ vibrancy is at risk, and they will have to adapt.” (McKinsey Global Institute, July 2023)
In response to this new reality, real estate players started adopting and implementing hybrid solutions, diversifying the functions of buildings beyond a single use.
This article explores the current hybrid practices in real estate, their impacts, and the challenges they pose to the industry.
Hybrid spaces: what are they?
Hybrid spaces usually refer to the transformation of a building to combine different typologies of uses within a single structure or the conversion of a building from one purpose to another.These transformations can occur at any stage in a building lifecycle and usually address pressing real estate challenges. A typical example is converting vacant offices into housing, which is gaining traction in cities facing significant housing shortages. It could help meet growing housing demand and represent a sustainable solution.
For instance, the city of Paris started adopting hybrid strategies and has launched several innovative projects. One such project is Morland Mixité Capitale, a former police prefecture transformed into a mixed-use space featuring a hotel, youth hostel, swimming pool, art gallery, restaurants, shops, etc. Delivered in 2022, the project has earned multiple labels and certifications, including BREEAM - a certification that assesses the sustainability of buildings across various categories.
Converting existing spaces rather than constructing new buildings is a strategic choice for investors and property owners. It helps the real estate sector adopt sustainable practices to achieve net-zero targets and address climate urgency. Refurbished buildings that undergo a use change, typically incorporate sustainable materials and practices, enhancing both resiliency and long-term value. This approach helps prevent assets from becoming stranded or subject to brown discounting. Additionally, it makes them more attractive to investors as resilient, future-proof properties.
The rise of hybrid work is reshaping real estate
Beyond maximizing the utility of existing resources, this approach aligns with sustainable development principles by reducing the need for new construction. The pandemic has accelerated hybrid practices adoption, already discussed before COVID-19, by pushing industries to adapt rapidly. The shift to remote work, in particular, has brought major changes to the office, residential, and retail markets:- Office: The rise of remote work has reduced office attendance, prompting employers to downsize their spaces. As a result, many tenants are opting not to renew their leases or are negotiating shorter lease terms with property owners. This further exacerbates vacancy rates.
- Residential: The demand for residential spaces in urban cores has slowed, leading to what’s known as the “doughnut effect.” In concrete terms, it means suburban housing prices have surged, and prices in city centres have softened as residents move outward.
- Retail: The retail sector has experienced steadily rising vacancy rates since the pandemic. Many retailers continue to downsize or close altogether, with temporary landlord concessions merely postponing inevitable closures.
Converting empty office spaces
Although a significant challenge, repurposing vacant offices offers an opportunity to reimagine cities and align investments and strategies with emerging demands.From offices to housing
While the office sector faces a significant decline with higher vacancy rates, residential assets have shown resilience and growth in recent years. Therefore, investors are increasingly drawn to the potential of residential properties.
The most widely adopted approach to date has been converting offices into housing, as major cities worldwide face significant housing crises. Office spaces offer ample opportunities to create apartments, addressing the growing demand for residential units while revitalizing deserted business districts.
From offices to student and senior residences
This approach could provide the housing needs of both students and seniors, reflecting shifting demographic trends. In Europe, student housing has shown remarkable resiliency, with growing demand and interest from investors for student accommodation. At the same time, the aging population (the EU’s aging population continues to rise, with Germany and France seeing their over-80 demographics increase by 2.4 million and 3 million in the next 20 years) has made senior living into a promising and demanding segment.
From offices to data centres
Empty office spaces could also be repurposed as data centres. The growing demand for data storage makes transforming offices into data centres increasingly viable, as these facilities require large, open spaces.
From offices to hotel stock
Another option is converting office spaces into hotels. Their central locations make them ideal for attracting both tourists and business travelers. For example, in London, there has been a growing trend in recent years of repurposing office buildings into hotels. These transformations that could maximize occupancy rates and profitability.
From offices to leisure facilities
Transforming vacant office spaces into leisure and recreational facilities, such as gyms, cinemas, or cultural centres is another strategy. These conversions offer an opportunity to enhance services in urban areas and improve the overall well-being of residents.
(FreePik)
Mixed-used developments
Mixed-used is another realistic hybrid solution that could help cities adapt to the current needs. This involves constructing adaptable and modular spaces that serve various functions over time. Essentially, mixed-used solutions refer to creating “neutral” buildings with flexible design, infrastructure, and technology, easily repurposed for different uses. For example, a medical building could be transformed into an apartment complex, a hotel, or a cultural center based on demand.On a simpler level, some buildings are now being designed to accommodate different types of workspaces or office arrangements. This practice offers the flexibility businesses require in a world where work dynamics are increasingly versatile.
Another approach includes mixed-use neighborhoods. This means diversifying areas traditionally dominated by a single real estate segment, like offices, by combining a mix of office, residential, and retail space.
Whether applied to buildings or neighborhoods, this mixed-used approach can improve the financial performance of portfolios while enhancing resiliency and providing investors, developers, and cities more incentive to invest in them.
Hybrid spaces: a complex and broad trend
Despite its potential, the hybrid approach to building comes with numerous challenges. From legal and financial hurdles to regulatory differences across countries, this shift will take time to materialize fully. Depending on the location of the assets, regulations and stakeholders may either facilitate or hinder the process.Technical and legal challenges
One of the main challenges is technical, as the structural differences between buildings can vary significantly. Converting offices into housing requires substantial changes. This includes, for instance, improvements to soundproofing, reorganization of layouts, and the division of large spaces into smaller residential units. A thorough assessment is necessary to determine whether such a transformation is possible and economically viable.
Furthermore, converting spaces often requires a change in the building purpose, which needs to be approved by the concerned authorities. Navigating this approval process can be complex, time-consuming, and an economic burden.
Here’s an overview of how different countries approach hybrid real estate strategies:
France
To convert offices into residential units in France, investors must secure a building permit while adhering to the local urban plan (Plan Local d’Urbanisme, PLU in French). Additionally, the RE2020 regulation requires compliance with stringent environmental standards when doing major renovations and/or new constructions. These strict regulations significantly impact renovation costs and often deter investors from converting spaces.
However, the French government is increasingly supporting these initiatives through various incentives. Recently, a proposed bill seeks to simplify the conversion of non-residential buildings into housing by addressing regulatory and administrative barriers. This includes introducing a “reversible” building permit to streamline the process and encourage more adaptive reuse of existing spaces.
UK
Since 2013, England’s “permitted development rights” (PDR) have permitted the delivery of around 121,000 flats. Introduced to address the severe housing crisis, PDR was designed to allow developers to convert commercial buildings into residential units without full planning consent. While this policy has improved housing delivery, a 2018 RICS study revealed significant gaps in housing (size, amenity space, location, etc.). PDR is now a subject of debate and it might disappear in the future to be replaced by other government initiatives.
While simplifying processes is essential to encourage space conversions, guidelines must ensure that new housing meets quality standards. Furthermore, investors must consider climate risks, such as rising temperatures and heat waves in the UK. Poorly designed buildings not only increase vulnerability but also jeopardize long-term value and profitability.
US
In the US, zoning laws represent a significant constraint. While they vary by region, they dictate how properties can be used within a particular area. This typically prohibits residential uses and developments in commercially zoned areas. As a result, converting spaces can become a lengthy, expensive, and complex process, discouraging investors and property owners.
However, in recent years, local governments have been working to address this issue. New laws to change zoning rules have been introduced in various States to support more housing development and tackle the ongoing housing crisis.
Read more: The US approach to ESG compliance in real estate
Financing
Another significant challenge is financing, as the transformation needs to be profitable for investors. Stakeholders must carefully consider certain factors, such as the purchase or lease of buildings, the conversion costs, and the revenues these conversions will turn into.
Securing financing for such conversions can be complex, primarily as investors must ensure that the gap between the upfront costs and future revenues remains bearable. The decision to reinvest in CapEx for renovations versus pursuing a more comprehensive conversion strategy should be carefully addressed.
A key factor is the rent price difference between office spaces and housing. It helps determine the economic viability of the project. Several other elements influence rent rates, such as current market conditions, the building’s structure, location, and class. If the rent for office space significantly outpaces residential rents, owners may determine that converting to housing isn’t financially profitable.
However, conversions can offer potentially more significant returns, especially in areas with high housing demand and a high office vacancy rate. For example, a 2023 Deloitte study on the US market projected that by 2027, changes in rent prices, valuations, acquisition costs, conversion expenses, and additional government incentives could enable developers to achieve profitable returns from converting office spaces into residential units.
Taking it to the next level
The rise of hybrid spaces in real estate offers a promising solution to the evolving demands of cities. It helps real estate players align with sustainability goals while addressing housing shortages and declining office occupancy. Though challenges remain, embracing hybrid real estate models can strengthen portfolio resilience and help cities adapt to a changing world.Yet adopting hybrid practices will take time, as it poses challenges. The costs associated with building conversions, navigating zoning and legal requirements, and securing financing can be considerable. On top of that, hybrid spaces are bound to stringent ESG regulations, which real estate players must carefully navigate.
Therefore, prioritizing action plans and investments can prove difficult. At Deepki, we are committed to helping real estate investors and owners build comprehensive action plans and outline key steps to safeguard your portfolio value. We provide our deep expertise and end-to-end platform, essential tools to ensure your compliance with major regulatory standards, maximize long-term portfolio value in the ever-evolving real estate market, and guarantee strong resilience.
Empowering a climate-resilient real estate
Download Deepki’s latest white paper and learn more about the critical steps to building a resilient portfolio. As real estate faces pressing challenges - rising sea levels, intensified storms, and other extreme events - stakeholders must adopt a comprehensive, complete approach to mitigate these climate risks and ensure portfolios’ sustainability and profitability.This article originally appeared on Deepki.com