Sydney: out with old offices, in with new apartments

Demand for city living is keeping balance in the market for Sydney office buildings, as developers snap up stock to turn it into apartments.

CBRE research shows residential conversions make up 3.1% of office stock in Sydney’s CBD and North Shore markets.

It’s a trend that’s also being seen in other capital cities, particularly Melbourne and Brisbane.

The Block shows the way

And it has gained national prominence through Channel 9’s hit reality TV show The Block, which has tackled commercial-to-residential conversions in its past two series.

Read more: The Block: turning commercial buildings into luxury homes

CBRE’s ViewPoint report says 154,090 sqm of office space is being removed from Sydney’s CBD for residential conversions, while another 46,166 sqm is being turned into homes on the North Shore.

Read more: Why are so many old offices being turned into new homes?

Office market balanced

CBRE Research Analyst Megan Pryor says this will help keep the market balanced in the next four years and will contain increases in vacancy rates.

“While conversions are not the sole panacea, the trajectory for rental growth and vacancy would certainly be weaker if these buildings were not being withdrawn and on our numbers the CBD vacancy could have been peaked close to 2% higher over the next few years,” Pryor says.

CBRE estimates Sydney’s vacancy to peak at 10.3% in 2015, with the addition of Barangaroo – the $6 billion waterfront precinct, with commercial towers, apartments and James Packer’s new casino.

Conversions are not the sole panacea but vacancy rates would be weaker if these buildings were still on the market.

Without residential conversions, CBRE estimates the vacancy rate would have peaked at almost 12% in 2017.

Vacancy rates tipped to edge higher

“Our current expectation is that prime net face rental growth will remain soft over the next two years as vacancy edges higher,” Pryor says.

“However, rental growth would be up to 1% lower in both 2015 and 2016 in the absence of residential conversions and the recovery in 2016/2018 more muted.”

Prices up, vacancy rates in check

CBRE Capital Markets Director Simon Kasprowicz says there are two benefits from the residential conversions.

“Increasing pricing on commercial space – specifically B and C grade assets that can be converted or re-developed to residential – and also providing for better performance on office investments by keeping vacancy rates in check,” he says.

But while the trend of converting offices into apartments continues to grow, it’s worth remembering that not all buildings will fit the bill for transformation.

Read more: 5 factors that make an office building right for apartments