In a city like Hamburg, where 600,000 square meters of office space remain vacant, only 29 listings are available for every 1,000 apartment searches, according to NDR in April 2024. This begs the question: why aren’t vacant spaces simply converted into housing? “Repurposing” is the much-cited keyword, with “building within existing structures” as the approach. Reducing emissions and minimizing embodied energy are also key goals. But transforming office and commercial spaces into residential units—is it feasible? What characteristics must buildings have to make this possible, and what regulations need to be met? Where do the housing and office markets currently stand, which trends are likely to stay, and what keeps the industry up at night? These are the topics Matias Otto, architect, project developer, partner, and Head of Real Estate at enomyc, addresses.
Mr. Otto, you have over 25 years of experience in the real estate industry, are an architect, and worked as a project developer for many years before moving into consulting. What topics are currently occupying your attention regarding the German real estate market?
What concerns me is the overall situation—the simultaneous development of so many different trends, some of which are moving in opposite directions. I've never seen anything quite like it. The effects of the shift in interest rates add to this, both directly and indirectly. Some of these changes are structural in nature. Remote work and mobile working alone have far-reaching effects.
What makes this structural?
A certain level of office vacancy will accompany us for the foreseeable future. For many institutions and analysts, vacancy is primarily an indicator of the current economic climate—meaning, when the economy is booming, more office space is needed, and vice versa. While this is still partly true, remote work and mobile working are here to stay to some extent, which means that a portion of vacancy will remain, less dependent on economic cycles. This “baseline vacancy” reflects properties that, economically or functionally, can’t adapt. There are various perspectives on this within the office market. That aside, it’s a very exciting time for the real estate industry—though, unfortunately, it’s not all positive trends.
What other changes are shaping the situation in the residential and office markets?
For example, construction and financing costs: they have risen sharply, especially compared to previous years. Since then, the market has not yet returned to a stable, functioning level. Regulatory requirements have increased, significantly impacting financing, planning, and construction. The shortage of skilled workers in construction is also a major issue. All of this is leading to a weak—some would say disruptive—market development. The demands of ESG and digitalization haven't even been factored in yet. This is where we stand right now, and in my view, the situation is far from resolved.
Is there one particular development you are following with great interest?
Yes, I find it especially interesting to see how the different market players are responding to the simultaneous occurrence of various developments. Those who can afford it tend to adopt the "close your eyes and push through" approach. Others act cautiously, more conservatively. They’d rather not make any deals at all than engage in ones that are too risky or fail to adequately cover the high risks—especially in project development. Then, there are those who seize opportunities. The interrelationships and dependencies are complex. Looking at individual aspects, such as regulation, construction prices, the investment, financing, or rental markets, only takes you so far. It’s a holistic development that requires a holistic perspective.
Is there a particular topic within this overall context that stands out to you?
Yes, it’s the economic consequences that ESG regulations have for property owners. Looking back, it’s clear that even though the real estate industry is not known for being particularly innovative, it was ahead of the curve in certain aspects of the ESG trend that later became widespread. For instance, building certifications and their predecessors have been topics within the industry for surprisingly long. Sustainability was initially a topic only in the professional investment market—primarily for buyers, sellers, institutions, family offices, and other larger market participants. However, this has also firmly established itself in the tenant market in recent years. Especially in the office sector, it’s no longer just buyers and sellers who determine the ESG standards of a property or portfolio: ultimately, tenants also influence this through their demand.
How exactly?
Tenants express specific requests for lease agreements. And these tenants are not just large corporations or government-like market participants; they also include smaller offices or businesses for whom sustainability is important.
What effect does this have?
This creates new questions regarding the leaseability of existing buildings. For example, properties that were previously considered solid were assumed to have longer remaining useful lives. But now, we are facing a situation where these buildings are experiencing what could be called "artificial obsolescence" and shorter remaining lifespans.
Does this lead to a trend toward greater efforts in "Manage to Green"?
On the side of property owners and asset managers, the topic is omnipresent. Many are dealing with real estate portfolios that don’t fully meet ESG standards. The question is: What returns do they want to generate from such properties, and what must be done to achieve that? This is why investments in renovations today are significantly higher than the standard required just a few years ago. ESG requirements are driving this. For some solid properties built in the late 1980s or early 1990s, it’s now about tackling fundamental issues—such as the façade or technical infrastructure. This increases the financing volume without immediate additional returns. It also raises the need for more consulting.
What kind of consulting needs are we talking about?
In many cases that enomyc has supported in recent years, the decision was made to reposition a property through refurbishment. Repositioning involves reintroducing a property into the market with a new position and image. This, of course, must be supported by substantial content. Refurbishment involves making deep changes to the property—sometimes down to its very structure. As a project developer, I have, for example, overseen a project where something completely new was created out of the building. Only its partially listed façade and basic structure remained. While it was an impressive result, this exceptional case may have involved even higher investment costs than a new build.
"Building within existing structures" is considered forward-thinking. Politically, there is often an emphasis on the need for the conversion and repurposing of existing buildings—not just to save grey energy and meet climate goals, but also to create urgently needed housing.
Absolutely. In attractive metropolitan areas, there is a huge and unmet demand for affordable housing. And the imbalance in supply and demand is becoming more pronounced. Building permits, which are a leading indicator for the creation of residential spaces, have been decreasing by double-digit percentages for the past two years. While the coalition agreement promised the construction of 400,000 new affordable, climate-neutral apartments annually, I believe that this goal was already unrealistic at the time of signing. In reality, it hasn't been achieved anywhere near that level. To be fair, the reasons for this are not solely political.
So, the question arises: Can't vacant office space simply be converted into housing? Currently, in Hamburg, 600,000 square meters of office space remain unused. BNP Paribas recently reported that in Q2 alone, 7.1 million square meters of office space were vacant in Germany’s office hotspots.
This is a legitimate question, and I can understand why it’s being asked. The discussion itself is valid and welcome. However, unfortunately, the answer is: No, it's not that simple. There are numerous reasons that speak against it.
A recent study by the ifo Institute and Colliers states that around 30 percent of vacant office space in cities such as Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart, and Düsseldorf is technically and legally convertible into residential space.
This number from the study is striking. However, it does not align with our observations—neither of the market nor of our specific mandates. When it comes down to practical details, such as in a due diligence process, where the feasibility of a conversion must be evaluated, issues often arise that make conversion difficult or even impossible. Unfortunately, in my experience, a simple conversion is only possible in exceptional cases.
What factors make existing buildings attractive for conversion—both for the owners, the city, and future residents?
Several factors and aspects need to be considered here. A primary concern is the economic attractiveness—for owners, initiators, and financiers. What will the estimated investment in the conversion be? Can someone take on and finance this effort? What will the return be? After all, owners typically generate significantly higher revenue from renting office spaces than from renting residential units. Then there are location and urban planning factors: Does the property have an attractive macro and micro location? How accessible is it? What can be reached from there? Are there public transport options, good connections, and, depending on the property size, nearby amenities such as grocery stores and childcare facilities? Are the surrounding neighborhoods appealing, and would people want to live there? It’s of little use if the property itself is attractive but situated in a business district that dies out in the evenings or feels unwelcoming. Then it’s also about the immediate attractiveness of the property: Is the converted building well-executed? Does it have character? Can people feel comfortable there? What message does the façade communicate, and how does it integrate with the surrounding urban environment?
What technical and regulatory measures must be met before a property can be converted? What prerequisites and characteristics must a convertible existing building have?
This is where the details matter. These specifics can make or break the feasibility of a conversion. It starts with zoning regulations, which essentially dictate the type and scale of permitted use: Is construction or conversion even allowed? And if so, to what extent? Next comes building code law: How must something be built or converted? To name just a few aspects: How does the property comply with escape routes, vertical shafts, fire protection, structural integrity during the conversion, technical building systems, and utilities? How are noise, sound, and thermal insulation managed? How will the building be lit? What role does the existing façade play? Can floor plans be rearranged to create functional residential layouts? Are the right room types placed on the right side of the building? It’s a long list. Parking space requirements are also an issue. Essentially, when converting, you ask all the questions that architects ask when designing a residential building—only based on what is already in place.
The building regulations can indeed be very complex and may hinder construction projects. That’s why there are political efforts, such as in the Hamburg-Altona district, where the CDU has requested a pilot project from the Senate. The goal is to explore how simplified standards could facilitate the conversion of office space into residential units. What do you think: Is it realistic that regulatory barriers will be reduced in the construction industry?
First of all, I fully welcome any such approach or initiative, whether at the municipal, state, or federal level. The Federal Ministry of Building has been working for a while to achieve simplifications. The idea is decades old, and it’s a great idea. It’s brought up at every conference by real estate and related associations. Even the Ministry itself acknowledges that something needs to change.
But?
However, from my perspective, the measurable successes in this area have been quite limited, if not merely symbolic. There is the Building Code, which is a federal law. Then there is an overarching Building Use Ordinance and, somewhat confusingly, state-specific building regulations. While there is also a model building ordinance, I consider it a well-intentioned crutch that doesn’t really have much impact. Additionally, there are countless other regulations, guidelines, and laws. None of these can be simply overridden at the municipal level. Of course, the zoning plan tool exists, which allows a certain degree of design freedom during its creation, and municipalities differ in this regard: Some are more flexible, which is wise. But as an architect, I’ve worked a lot with building authorities, and I know that they operate under very strict constraints. Municipalities quickly risk lawsuits if details are not fulfilled.
Are there any pilot projects that might offer hope?
Yes, the "Gebäudetyp E" (building type E) offers some hope. This initiative has a good chance of being implemented in federal law. The pilot project was started by the Bavarian Chamber of Architects with the aim of building simpler, more cost-effective structures that still meet sustainability and quality standards. The goal is to build more affordably while maintaining the usual safety standards, but without having to meet the highest demands for comfort. The "E" stands for simple and experimental. It’s a good approach that points in the right direction. Sometimes there are also product-specific workarounds: They meet the necessary requirements but cleverly circumvent restrictions.
Do you have a concrete example?
Yes, one from the field of noise protection: Several years ago, I worked as a developer on a project where the "Hafencity Window" was used. The technical features and installation design of the windows allowed the original urban planning concept, along with the desired residential use, to remain intact. Even with the window partially open, the noise protection requirements were still met.
You transitioned from 15 years of project development to consulting, and since 2021, you've been Head of Real Estate at enomyc. What projects do you particularly enjoy today?
Regardless of the project or property, what I find especially rewarding are the mandates where our consulting efforts help move projects from stagnation to further development and finalization. Personally, I also really enjoy working with interfaces to construction project management. In general, the analytical part is certainly the most important, but I also derive a great deal of satisfaction from hands-on work, breathing in the atmosphere of construction sites, or engaging in technical discussions with planners.
What skill set does your Real Estate team at enomyc cover?
We provide consulting on all aspects of real estate, particularly in the context of restructuring – whether at the corporate or SPV level. Often, we work in project development and for developers, especially when projects encounter obstacles. For example, when financing decisions need to be made, questions arise regarding the cost to complete, or fresh capital needs to be injected into the company or development. We also consult in the transactional area of real estate – both asset and share deals, or in sale & leaseback structures, when owners aim to become tenants of their property and sell it to release liquidity. Our portfolio extends to supporting construction measures and construction project management. For this reason, I believe that a consulting team in real estate should deeply understand the property itself and its substance – from planning to completion, both from a real estate and technical perspective.
You are currently overseeing a project in Frankfurt-Niederrad: an office building is being converted into a residential building with 330 micro-apartments.
That’s correct. For this project, we are providing a comprehensive range of services – from planning and the conversion itself to leasing and transaction. The office building is well-suited to be converted into micro-apartments. A bit of background: Frankfurt-Niederrad was historically a purely office district, and residential living was not originally planned there. However, in recent years, with the development of the "Lyoner Quartier," this has changed, allowing for conversions. Open spaces have been filled with residential buildings. Some key attractiveness factors, such as the location and transport connections, are already in place. The city has also worked successfully to bring in essential services like grocery stores and daycare centers.
Speaking of micro-living, what trends do you see in the residential sector, and what issues are impacting the office market?
In the office market, the megatrend of "mobile working" will continue and influence the rental business. Vacancies, including hidden ones in less competitive properties, will increase. Corporates that want their employees to spend more time in the office will need to respond by offering more attractive office spaces. Those who reach this conclusion for their own business will need to invest in factors like location, floor sizes, and office layout. Mobile working will also affect the layout of office buildings, meaning fewer two- or three-axis concepts where offices are arranged in rows. Instead, there will be more shared spaces—office areas designed for flexible use. As for the residential sector in urban areas, I think micro-living and commercial housing will increase—such as serviced apartments or boarding houses. On a broader level, both the office market and the residential sector will continue to focus heavily on ESG (Environmental, Social, and Governance) issues and sustainability.
Are there any real estate projects in Hamburg or globally that you find particularly impressive?
There are many! Across Hamburg, you can see a high standard of urban planning and architecture. There's so much to discover! One project that comes to mind, which is near our own office in Hamburg, involves the renovation and refurbishment of an existing office building: a listed office complex that was formerly the Hamburg-Süd building from 1964. The facades were completely replaced, bringing the energy and transmission values up to current standards. The high-rise was even extended by one floor to restore the original proportions, which had been altered by the new facades. In my opinion, the way the building's original structure was handled is truly impressive. The property's usability and value were significantly increased. And despite the extensive modernizations, they managed to preserve the entire ensemble, this "cool child of the '60s," in its impressive elegance and cosmopolitan flair.
Thank you for sharing your insights, Mr. Otto.
