The real estate market is strongly connected to the evolution of the economy at the local, regional, and global levels, so the challenges of recent years – increasing construction costs, changing preferences of consumers and availability of financing – have significantly impacted medium and long-term development strategies, write Alexandra Smedoiu and Marius Vasilescu, Partners at Deloitte Romania for Property Forum.
This article was first published in Property Forum’s annual listing of "The 50 most influential people on Romania’s real estate market”.
Thus, players are looking for solutions to optimize business models, explore new ones and even consider the conversion of properties for which the demand has slowed down, and it is expected to remain low in the coming years (such as office buildings) into mixed-use spaces or residential-to-rent projects.
This trend is quite advanced in the US, where the shift to the hybrid working model increased office vacancies, and transforming these spaces could help mitigate the shortage of affordable housing in the US market.
Deloitte estimates show that, by 2030, approximately 14,700 affordable housing units can be added to the market stock across the country, considering that only 20% of vacant office spaces can be converted into such homes.
Moreover, noting the decline in the office market, the authorities in several US states have proposed specific actions to support office-to-housing initiatives, aiming to reduce the housing deficit in the market. Indirectly, such regulations also help real estate players to streamline their assets.
However, this trend is expected to manifest itself more in the case of class B and C buildings, as class A vacancies are unlikely to persist in the long term due to flight-to-quality tenancy trends supporting occupancy in this class profile.
Reprofiling, the main direction in Central Europe
The office market is also stagnating in Central Europe, with reprofiling on other market segments being the most important trend of 2024, according to Deloitte studies, given that a quarter of the analyzed players are considering such a change. Here both office (three quarters) and commercial (half) developers say they will focus on other sectors this year, especially on mixed-use assets (which can be quickly transformed depending on the field with high demand) or residential-to-rent projects.
At the same time, the percentage of investors who will focus on office buildings in the near future decreased significantly (only 4%), while a quarter favor the transition from offices to the industrial or hotel sector, followed by mixed-use buildings and retail.
In Romania there is also a trend of reconverting office buildings into housing since the onset of the pandemic, amid the increase in the vacancy rate, but currently the transformation of commercial spaces into office buildings is also discussed. As a result, the real estate market is dynamic and flexibility is the key to maximizing financial results.
Therefore, the trend of reprofiling or the reconversion of assets is gaining more and more ground among real estate players, but the process is quite costly, so positive results are expected within a few years. Under these circumstances, and considering the accelerating transformations in the global economy, future real estate developments are likely to be designed from the outset to allow multiple uses and faster reconversion, to shorten the payback period.
In addition, beyond making real estate more flexible to serve multiple purposes, medium-term development strategies must also incorporate advanced technology features to improve user experience, directly or indirectly, by analyzing data collected by high-performance systems, which can lead to identifying user needs and solutions to address them.
Thus, technologies such as water conservation, the optimization of heating, solar panels and other renewable energy sources can transform the environmental impact of buildings, while building automation systems and predictive maintenance can streamline their management. Under these circumstances, minimizing time and material waste, reducing costs and energy, etc. can be made.
Buildings currently represent 40% of global energy consumption and 33% of total greenhouse gas emissions, so smart buildings will give the real estate sector a leading role in shaping a sustainable future.
This opportunity is very important, but its benefits will depend on equipping buildings with connected devices (which provide behavioral insights for building management but must be used effectively and ethically to maximize their benefits while respecting individual privacy), but also on the companies’ ability to protect themselves from cyberattacks, the main threat to these investments.
Factors to consider for increasing the property value
Consequently, real estate players, including those in Romania, need to revalue their portfolios and analyze to what extent certain assets are suitable for conversion, what would be the related costs and how they could maximize the value of their assets.
To this end, companies should take into account the concepts underlying the value of a property, the key factors that influence this value and build strategies to increase the value of the investment.
In terms of factors contributing to the overall appreciation of a property, they can range from the physical characteristics of the property, such as size or condition, technical facilities, location, and market conditions, especially in the area the property serves or in areas for which it would be suitable for conversion.
Location is extremely important especially if the owner is considering reconversion from an office building to an apartment building, for example, because such a decision should also consider the attractiveness of the area for people – proximity to the center, adequate transport infrastructure, good schools, and high living conditions.
Improvements and renovations could help increase the value of buildings, but they must be carried out according to the future use of the building, as well as trends in tenant/user preferences.
These can range from allotment to an attractive interior design, landscaping within the development site boundary, to smart technology features such as automated heating/cooling systems (which would help optimize energy consumption, in the context of increasing general concern for sustainability), high-performance security systems, etc., to transform a classic building into a smart one.
Understanding these factors is essential both to accurately assessing a property and to deciding the most suitable improvements to add value to the building.
In conclusion, the real estate market is constantly changing, in line with the economic developments and changes in user behavior, so companies must show flexibility to benefit from all the opportunities these changes provide.
