Converting office buildings into serviced apartments:
opportunities, costs and viability

Vacant office space opens new possibilities for investors and project developers. But when does a conversion into serviced apartments pay off – and what actually matters in the planning?

The property market is changing. Flexible ways of working, working from home and changing requirements for modern workplaces present owners of traditional office buildings with new challenges.

Older office buildings in particular cannot always be adapted to what companies expect today without substantial investment. At the same time, many property owners are asking how existing space can be used commercially over the long term.

One interesting possibility is converting office buildings into serviced apartments.

A successful change of use takes more than a conversion of the building. What decides it is the right location, a commercially viable use concept, and taking the later operating processes into account early.

Why serviced apartments are interesting for existing properties

Serviced apartments combine the advantages of a self-contained flat with selected services of a hospitality business.

The apartments are fully furnished, usually have their own kitchenette, and suit both shorter and longer stays.

Potential audiences include business travellers, project staff, fitters, companies and guests who need accommodation for a time.

For owners and investors, that can open interesting prospects.

While classic office space is often let long term to a single company, serviced apartments allow different lengths of stay and flexible marketing.

Depending on the location and demand, that can create an attractive earnings potential.

Not every office building is automatically suitable for this use, though. Viability depends above all on local market conditions, the investment cost and the later operating concept.

Which office buildings are suitable for a change of use?

Whether an office building can be converted into serviced apartments depends on several factors.

1. Location and demand

Location is one of the most important conditions for commercial success.

In cities with a large number of business travellers, major employers, industrial companies or project sites, there can be demand for temporary accommodation.

Regions shaped by tourism can offer interesting possibilities as well.

What decides it is which audiences are actually present at the location, and which length of stay, fit-out and price structure they expect.

A careful analysis of location and demand should therefore stand at the start of every project development.

2. Floor plans and the division of space

Not every office floor can be divided into individual apartments in a way that pays.

Particularly relevant are the existing building depths, window areas, circulation routes and the scope to install additional bathrooms and kitchens.

The size of the later apartments also plays an important role.

Units that are too large can hurt viability if the achievable nightly rates are out of proportion to the floor area.

Units that are too small can, conversely, exclude certain audiences or make longer stays unattractive.

The right division should therefore not follow construction grounds alone, but a concrete operating concept.

3. Technical conditions

Converting office space into serviced apartments often requires changes to the building services.

These include in particular:

• Water and waste-water connections for kitchens and bathrooms
• Electrical installations and sufficient connection capacity
• Heating, ventilation and, where needed, cooling concepts
• Fire and sound protection
• Internet supply and digital access systems
• Requirements for escape routes and circulation

Installing a large number of kitchens and bathrooms after the fact can account for a substantial share of the conversion cost.

The technical conditions should therefore be checked before a purchase or a binding project decision.

Change of use and permissions: what needs attention?

An office building may not automatically be used as a serviced-apartment building.

In many cases a legal change of use is required.

Whether such a use is permissible depends, among other things, on the applicable zoning plan, the planning-law classification of the intended operation and the local rules.

Additional requirements can arise for parking, fire protection, sound protection and access.

The line between residential use and commercial hospitality also plays an important role.

Depending on the use concept, different legal requirements can apply.

Investors and project developers should therefore clarify early, with the responsible building authority and qualified specialist planners, whether the intended concept can be approved.

Early coordination can help avoid costly changes to the plans and delays.

Viability: what decides the success of a serviced-apartment project?

The most important question is not only how many apartments can be created in a building.

What decides it is the commercial return the property can achieve over the long term after the change of use.

Both the one-off investment costs and the later running operating costs have to be taken into account.

Calculating investment costs realistically

The essential cost items include:

• Acquisition costs, or the existing property costs
• Planning, permissions and the physical change of use
• Building services
• Kitchens, bathrooms and furniture
• Digital access and management systems
• Marketing and opening
• Financing and sufficient liquidity reserves

With existing buildings in particular, extra reserves should be planned for unexpected construction challenges.

Assessing revenue and occupancy properly

For later viability, three figures in particular are decisive:

1. Average nightly rate: What price can realistically be achieved for that apartment category at the location?

2. Occupancy: How many nights a year can the apartments be expected to be let?

3. Operating costs: Which running costs arise for cleaning, laundry, staff, distribution, energy, administration and maintenance?

Only the interplay of these factors shows whether a project is commercially viable.

High theoretical occupancy on its own is not yet a guarantee of a sound return.

A high nightly rate does not automatically produce a commercially successful operation either.

Why the operating concept already matters during planning

A common mistake in developing hospitality properties is to finish the construction planning first and only then turn to the later operation.

Many operational requirements already influence how the property is best designed.

Apartment sizes, the number of bed spaces, the fit-out and the design of shared areas, for example, can have a considerable effect on the revenue that can be achieved.

Organisational questions should be considered early as well.

Where can cleaning materials and laundry be stored? How do guests reach their apartments? How can arrivals and departures be organised as efficiently as possible?

Such details often seem secondary during project development. In day-to-day operation they can cause considerable cost.

An operating concept developed early helps align construction decisions with commercial requirements.

Digitalisation and automation as a factor in viability

Serviced apartments offer good conditions for digitally supported operating processes.

Used with a clear purpose, modern technology can simplify or automate many recurring tasks.

These include, for example:

• Digital check-in and check-out
• Electronic access systems
• Automated guest communication
• Dynamic pricing
• Digital cleaning schedules
• Central management of bookings and distribution channels
• Automated internal processes and reporting

In smaller and mid-sized apartment operations in particular, considered digitalisation can help reduce administrative effort and improve viability.

What matters, though, is that the systems in use match the actual requirements of the operation.

Not every technical solution automatically creates a commercial benefit.

What decides it is that the processes work reliably in daily operation and fit together in a useful way.

Serviced apartments or classic residential letting?

When an existing property is converted, the question often arises which form of use makes more commercial sense.

Classic residential letting is usually geared to long-term tenancies. A serviced-apartment operation can address different lengths of stay and different audiences.

In return, serviced apartments bring additional costs for furniture, cleaning, laundry, guest care and distribution.

Returns can also move more with the seasons and with the wider economy.

Which option is commercially more attractive therefore cannot be answered in general.

A sound decision requires a comparison of different use scenarios, taking the investment and operating costs of each into account.

Smaller existing properties can offer interesting possibilities too

Conversion into serviced apartments is not suitable only for large property projects.

Smaller office buildings, former hotels, guesthouses or other commercially used properties can offer potential as well.

With a manageable property in particular, an efficiently organised operating concept can be decisive.

A professional hospitality operation does not necessarily need a classic hotel reception or extensive shared areas.

With a suitable audience, considered fit-out and digitally supported processes, smaller apartment concepts can be organised on a commercial basis as well.

Whether such a project is worthwhile should always be examined against the specific property.

How I support investors and project developers

With GASTWERT, I support property owners, investors, project developers and operators in the commercial conception, optimisation and further development of holiday rentals, serviced apartments and other hospitality businesses.

In doing so, I combine strategic advice with practical experience from my own operations.

Through building and developing living TIMELESS and the Erlenbad Suites, we know the challenges of short-term letting from daily practice.

I know which factors decide successful marketing, which costs arise in ongoing operations, and what digitalisation and automation make possible.

My advisory approach covers in particular:

• Location and potential analyses for hospitality properties
• Development of viable operating and use concepts
• Calculations of revenue, occupancy and operating costs
• Advice on apartment sizes, fit-out and audiences
• Digitalisation and automation of operating processes
• Building and optimising professional hospitality businesses

My aim is to look at property projects not only from a construction point of view, but especially with regard to their later commercial use.

Conclusion: the right planning decides viability

Converting existing office buildings into serviced apartments can be an interesting alternative to classic office or residential letting.

For properties whose previous use has lost commercial appeal in particular, it is worth examining alternative concepts.

A change of use does not run itself, though.

Location, the prospect of approval, the building fabric, investment costs and the later operating concept have to be carefully aligned.

Anyone who takes the requirements of day-to-day operation into account already in the early project phase builds a better basis for commercially viable decisions.