Developer John Love chuckles when he sees real estate agents advertising Auckland CBD office buildings as apartment conversion opportunities.
"It makes me laugh because not every office building is destined to make a great conversion," says the man leading the project to convert the heritage high-rise ex-Auckland Council headquarters on Aotea Square into The CAB apartments.
"The CAB couldn't be knocked down because it's protected and it's floor plates are too small for modern offices," Love explains as contractors jack-hammer floors out of the tower.
He did not know about the floors before he began: "And that hits the nail on the head. You can look at the plans as-built 30 or 40 years ago but it's not until you pull the building back to its basic structure that you find what's there."
The Herald reported last month that developer Gary Groves' Sanctuary Developments No 8 was in voluntary administration after announcing it could not pay secured or unsecured creditors.
In a $250 million venture, the company had converted the ex-Fonterra headquarters on Princes St into The International, with about 90 apartments.
The concept of office-to-apartment conversions is topical, with some asking if we need all the commercial space we have in the city right now and pressure for more residential offerings.
Pete Evans, residential project marketing national director with real estate group Colliers International, certainly sees a trend to convert offices into apartments. As well as The CAB and The International, he cites the Botanica apartment project in Mt Eden's Enfield St.
"Covid has not only affected commercial occupancy in the CBD, but it has also impacted retail, bars, restaurants and entertainment, thereby reducing lifestyle amenity in the CBD. But with more people working from home and being more mobile, there is more demand for lifestyle amenity in the city fringe and suburban centres," he says.
But converting offices to apartments is not as easy as some people think, he warns.
Some of the problems he cites include the demand for more carparks in apartment blocks compared to offices, and the fact that existing commercial building floor plates are often deep, and typically a square. Apartment blocks are usually more rectangular, with a glass frontage and balconies key to their success, he says.
As well, office buildings are also often close up against other buildings, while apartments need a better outlook, sun and privacy, he says.
"The cost of converting commercial to residential is high because slabs and lift cores are kept and the rest is new construction. So there are some savings on build cost, but not major savings."
Shane Brealey, of specialist new apartment developer NZ Living, says conversions are carried out all over the world and are successful. In this country, the industry is about three decades old.
He cites a building at 135 Symonds St and the Lamont brothers, who converted the old Winstones building on Khyber Pass Rd into apartments, re-named SKHY.
Apartment conversions work well in concept, Brealey says, because:
• The design live loads for office floors are 3-5kPa - a measure of the load they can carry - and for apartments they are just 1.5kPa, with 2kPa on balcony areas, so structurally office buildings should be more than adequate as apartments
• Floor-to-floor heights in office buildings are usually 4m compared with 3m for residential, so a conversion can result in far higher ceilings than could be built from new
• The lift capacity needed to cater for peak office movements is greater than it is for more uniform residential peak loads, so the number of lift shafts would be ample, although lifts are usually upgraded or replaced during conversions
• The ratio of carparks to offices should work fine for apartments
• Change of use for resource consent should be faster because the building is already there. The challenge is with facade designs and street interfaces
• Construction can be faster and cheaper. No crane is needed, just hoists and perhaps spider cranes on the roof for the new facade installation
However, Brealey says the challenges to overcome include:
• Getting the facade and balconies to work with a step-up in floor surfaces, needed for weathertightness;
• Doing thorough due diligence on the structural integrity of an existing office block, all the way from the piles to the roof;
• Designing to meet new structural codes may mean new structural steel bracing elements are needed, adding complexity and cost;
• Sound insulation between floors needs to be better in apartment buildings than offices.
"My guess is that most conversions that come unstuck are as a result of insufficient due diligence on the structure, acoustics and fire separations," Brealey says.
"It's not for the faint of heart," Auckland property developer and investor Ted Manson says about developing buildings.
The patriarch of New Zealand's largest privately-owned development business, Mansons TCLM, says he speaks from experience in describing the challenges.
"There are many cogs in the wheel of property development and if one cog slips, you can lose it all. Property development is not for the faint of heart and when you look back over the last 50 years, very few are successful."
After the 1987 sharemarket crash, recalls Manson, a lot of commercial CBD buildings were left vacant and many were converted to apartments.
"We purchased more than our share of those and successfully converted them to residential." The business also developed apartments above the former Victoria Markets car park, now the Swiss-Belsuites Victoria Park.
Today, the Mansons' family business specialises in commercial projects and does little residential development. But he says the conversion business was lucrative for the company last century.
"Most were very profitable. It'll be the same today. If the developers can purchase the site at a reasonable price and they are very good - strong at making sure they don't get too many cost overruns - they should be profitable," says Manson. "As we know, the residential market in Auckland has increased quite considerably in value lately - Wellington even more - so the good operators will make good money."
Bindi Norwell, chief executive of the Real Estate Institute, says one of the biggest issues for the Auckland property market is a shortage of housing stock. Conversion projects are helpful as they increase supply.
"If the cost of conversion was too high and ultimately didn't result in a profit, it may be unlikely that the developers would receive funding from the bank or be interested in the development.
"Innovative solutions like office conversions, build to rent, rent to buy and the use of prefabrication are to be welcomed," she says.
Another active commercial developer, who preferred not to be named, says it is far cheaper to convert an office building than to build new.
"It means a converted building can offer a price point quite significantly better than can be achieved on a new build," he says.
Conversions are much quicker to turn over, so the time from inception to completion and therefore the return is much better. Put simply, conversions are more profitable than new builds, he says.
A 25 per cent return in two years is better than the same percentage return over three years.
"But this speed is dependent on the complexity of the conversion. Many buildings require substantial structural amendments and skin replacing and the saving gets minimal when that occurs," he says.
Employers are liable if their employees are hurt in earthquakes, he says, "so there is a strong inclination to exit older buildings and relocate to new buildings".
However, many of Auckland's smaller buildings were carved up into separate titles in the '80s and '90s for quick flick developments, he notes, so much of the stock that could potentially be redeveloped into residential is off the table.
"It's very difficult to buy up multiple floors that are owned by multiple owners and expect the cost to remain economical - even if those owners will sell."