The purpose of real estate investing is to convert available credit or capital into an income stream. Investors and businesses may acquire commercial real estate with the intention of placing tenants at the property and collecting rent. Other times, the goal is to buy when property is affordable, make improvements that increase its value and relist it for sale for a profit.
For many years, office buildings were one of the most lucrative and reliable sources of revenue for commercial real estate investors. However, that has shifted in recent years. The increasingly digital economy makes office facilities unnecessary for many successful businesses.
Buildings that may have once had waitlists for tenants who desired space there may now have numerous vacant units due to a significant drop in demand. Investors have started to pivot away from renting office space by converting those spaces into residential units. Those with office spaces in their portfolio and those considering buying buildings while demand is low need to plan carefully.
Challenges abound when redeveloping buildings
Turning a vacant office building into a condominium building with multiple units could help turn a red mark on the balance sheet into a profit-generating investment again. Sadly, the process is fraught with potential pitfalls. The building may require substantial investments to make the resulting units compliant with building codes.
Investors trying to convert existing facilities may also run into challenges related to zoning. People often take for granted the idea that they can change the zoning at a property, but there is no guarantee of success when trying to convert a commercial space into a residential one.
There are typically two ways to adjust the existing zoning at a building zoned for commercial use. In some cases, it may be possible to obtain a zoning variance. Other times, officially rezoning the building is the best solution.
Either option could very well take months to complete. Typically, both the local community and municipal authorities have a degree of say in whether or not the property owner can change the zoning. Factors including the characteristics of the community and the impact that residential units might have on traffic or parking can impact how nearby property owners respond to the proposed zoning changes.
Correcting the current zoning is just the first of many practical challenges that may arise during a major redevelopment project. Investors and business owners who have the right assistance throughout the process may increase their chances of successfully overcoming those obstacles.
