Converting offices and stores into homes: is it already a trend in Portugal?

In Portugal, there is a serious housing problem due to a lack of supply amid high demand, accompanied by rising real estate prices in the context of decreasing purchasing power, increasing inflation, and rising interest rates.

To tackle this challenge, the market is developing solutions. Converting buildings that were previously used for commercial services into residential spaces is one of them. Inspired by other countries where the conversion of shops, warehouses, and offices into housing has become a "trend," particularly to address the issue of housing shortages, market players in Portugal are following this example. However, the process can be complex and carry risks (in addition to benefits).

In this context, it becomes clear whether "gentrification" of this type of real estate is already a common practice/trend in Portugal and whether it can succeed. To better understand this topic, idealista/news reached out to several specialists in the real estate sector from various segments shortly before the government promises to adopt a new Housing Law aimed at stimulating the construction of affordable housing.

In recent years, the issue of changing usage has become relevant again, and according to experts, there are several factors explaining its revival. The national housing market is facing a serious problem with real estate supply, with a lack of inventory amid high demand, housing prices continue to rise, and purchasing this type of property starts at a lower price; more and more shops and warehouses are remaining empty due to the growth of online commerce; a similar situation is observed for offices, as larger spaces are now required, and many have remained unoccupied after the pandemic due to remote work or hybrid models.

Trend in Portugal? Yes or no? According to some market agents that idealista/news spoke with, the conversion of commercial real estate into housing is already a reality in Portugal. Gonçalo Santos, head of Capital Markets at JLL Portugal, explains that "the significant wave of investment in urban redevelopment that we have seen over the last 10 years has been one of the factors in transforming small office buildings into residential projects," primarily for the mid-high and high segments, where future unit sales will significantly exceed the value of office spaces, even considering the necessary investments in reconstruction.

According to this expert, the new requirements for office use, "more modern spaces, larger open-plan areas, and new sustainability demands," are leading to a combination of two trends. "The freeing up of fragmented buildings that do not meet modern demand in the city center increasingly opens up space for alternative uses, such as housing," he argues.

Mariana Represas, a senior consultant for Capital Markets at Savills Portugal, shares this viewpoint. According to her, the conversion of service properties into residential spaces "is at the core of new projects in urban centers." As an example, she cites "over 100,000 square meters of offices that we assess as being converted for alternative uses, primarily into housing and hotels."

Alfredo Valente, the executive director of iad Portugal, believes that "to say this is a trend might be an exaggeration," however, he confirms that it is "a frequently observed reality." João Carvalho, co-founder of MELOM, sees the same picture. As the leader explains, this "fashion" is still "not very widespread in Portugal," although it has already become common practice in many European countries.

Mariana Morgado Pedrus from Architect Your Home (AYH) reminds us that "changing the use of a property is not always possible in many cities due to local master plan regulations."

In order for a building to be legally used for residential purposes - whether for personal housing, long-term rental, or short-term accommodation - it is necessary to undergo a procedure aimed at changing its license to residential. João Carvalho reminds us that "the request for a license for residential use must be submitted to the municipal authorities, who must decide on the approval of the conversion of the building from service or commercial to residential."

Moreover, he notes, "the delay in the process will depend on how each municipality functions and the specifics of the transformation itself. For example, it will be necessary to assess whether the building meets legal requirements for use as housing and whether the change in the architectural design distorts it.

“Municipalities must ensure the suitability of a building or part of it for its intended use and, consequently, ensure compliance with the law. We have no indication that there are obstacles, but there is always some discretion in making decisions, as the master plan will be taken into account,” adds Alfredo Valente.

Gonçalo Santos also emphasizes that in the current situation with significant delays in urban construction permits, "this first step in the process can take at least a year in large cities." "The time for changing the building's designation is the same as for the permit project; in fact, it can take from 4 to 8 months. I believe that the building needs to be modified - usually, we have to plan for the addition of a kitchen, extra bathrooms, etc. This means it will be treated like any other modification project and may take longer if there are many interactions with the municipality," explains architect Mariana Morgado Pedrus.

This is also a "complex issue" regarding financing, according to Miguel Cabrita, who is responsible for idealista/créditohabitação in Portugal. The expert believes that "there are many transformations of commercial spaces into housing being carried out illegally, as permits from municipalities take a long time, especially in large cities." "The main concern of municipalities is to maintain life in neighborhoods, which is largely supported by local businesses. As a result, banks are not willing to finance under the same criteria as mortgage lending. Financing is possible, but with different conditions, if everything meets the requirements for changing use according to the municipal decision," he adds.

Transforming commercial real estate into housing can be appealing due to cost and a lack of supply. But is it really an alternative? According to Gonzalo Santos, it "can be one of the solutions to increase the housing supply." However, he notes that "in light of the contradiction between the volume of demand and the current supply, this measure is clearly insufficient, as converting square meters of office space into housing does not have the necessary scale unless it is complemented by additional measures, including encouraging new construction for the segments of the population most in need of housing, such as the middle or lower-middle class."

“The concentration of commercial real estate is focused in urban centers, and at the moment, due to excellent employment figures, we are seeing an increase in rental prices, especially in the office segment. On the other hand, residential real estate is expected to suffer from inflation and rising interest rates, except for the higher segments. Thus, considering the rise in construction costs, the profits from such transformations may not be as favorable as in the past,” adds Mariana Represas.

Mariana Morgado does not believe that this is the ideal solution, as she states, "there is also a lack of service assets (offices) on the market." She also notes that the available free assets "are usually not very attractive to the general public." "We are talking about stores, warehouses, or any other commercial use on the ground floor with one or two streets. Not everyone wants to turn such properties into housing. In a building that consists entirely of offices, it will be difficult to obtain permission for a change of use, so I would rule out that possibility. However, there are various mixed-use buildings where a change is possible, and in this case, I believe there is great potential for transformation," the architect explains.

According to João Carvalho, this could be a way to stimulate greater housing supply in urban centers where prices are higher, "allowing for the attraction of young people to the heart of the city and revitalizing abandoned areas, for example, by converting shops into small apartments." Alfredo Valente believes that "it is hard to expect that we will find a solution to the housing problem in our cities here," but he thinks that it will allow for "the restoration of some spaces that were previously used for commercial or industrial purposes, for example, for student dormitories."