What happens to memory after '' in a C string?

Surprisingly simple/stupid/basic question, but I have no idea: Suppose I want to return the user of my function a C-string, whose length I do not know at the beginning of the function. I can place only an upper bound on the length at the outset, and, depending on processing, the size may shrink.

The question is, is there anything wrong with allocating enough heap space (the upper bound) and then terminating the string well short of that during processing? i.e. If I stick a '' into the middle of the allocated memory, does (a.) free() still work properly, and (b.) does the space after the '' become inconsequential? Once '' is added, does the memory just get returned, or is it sitting there hogging space until free() is called? Is it generally bad programming style to leave this hanging space there, in order to save some upfront programming time computing the necessary space before calling malloc?

To give this some context, let's say I want to remove consecutive duplicates, like this:

input "Hello oOOOo !!" --> output "Helo oOo !"

... and some code below showing how I'm pre-computing the size resulting from my operation, effectively performing processing twice to get the heap size right.

char* RemoveChains(const char* str)
 {
     if (str == NULL) {
         return NULL;
     }
     if (strlen(str) == 0) {
         char* outstr = (char*)malloc(1);
         *outstr = '';
         return outstr;
     }
     const char* original = str; // for reuse
     char prev = *str++;       // [prev][str][str+1]...
     unsigned int outlen = 1;  // first char auto-counted
 
     // Determine length necessary by mimicking processing
     while (*str) {
         if (*str != prev) { // new char encountered
             ++outlen;
             prev = *str; // restart chain
         }
         ++str; // step pointer along input
     }
 
     // Declare new string to be perfect size
     char* outstr = (char*)malloc(outlen + 1);
     outstr[outlen] = '';
     outstr[0] = original[0];
     outlen = 1;
 
     // Construct output
     prev = *original++;
     while (*original) {
         if (*original != prev) {
             outstr[outlen++] = *original;
             prev = *original;
         }
         ++original;
     }
     return outstr;
 }
 

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