From office to oasis: The rise of commercial-to-residential conversions

Empty storefronts, ‘For Lease’ signs, and a raft of eerily empty office spaces — Australia’s urban landscapes are undeniably undergoing a period of transformation. Once bustling hives of commerce, many commercial spaces now stand partially, or entirely, vacant.

The rise of remote work and the relentless growth of online shopping have dealt a double blow to traditional commercial and retail real estate, leaving landlords and developers scrambling to adapt. Add to this the current housing crisis of unprecedented proportions, with soaring rents and limited supply pushing homeownership further out of reach for many. In the face of these challenges a solution is emerging: the transformation of these vacant commercial properties into much-needed residential spaces.

“A combination of factors is driving the rise in commercial-to-residential conversions across Australia,” said Tas Costi, co-founder and director of Australia’s largest dedicated commercial property buyer’s agency Costi Cohen. “Office vacancies in certain areas, evolving workplace trends, and increasing housing demand, have created new opportunities for adaptive reuse.”

9/1 Danks Street, Waterloo has potential to be converted from office to residential. Picture: realcommercial.com.au

A post-pandemic property pivot

While life has seemingly returned to normal for many Australians, the pandemic’s impact on commercial real estate continues to reverberate. And the shift to hybrid and remote work models – which were once a temporary necessity – have become ingrained in many company cultures, reducing demand for traditional office space.

“The surge in commercial-to-residential conversions is driven by changes in the property market, including changing work habits post-pandemic,” said Steven Tropoulos, group director at finance and property advisory consultancy business Highfield Private. “With commercial property vacancies rising, particularly in secondary office markets, developers and investors are increasingly exploring alternative uses.”

As a result of this shifting work dynamic, many businesses are re-evaluating their office footprint and leaving a surplus of empty buildings as a result.

“The rise of remote and hybrid work, have reshaped demand for office spaces, leading to higher vacancy rates in certain areas,” said Mr Costi. “And while prime commercial areas and fringe CBD locations remain strong, some secondary locations have struggled to attract tenants, making them less viable for long-term investment.”

131-133 Devonshire Street, Surry Hills, NSW has residential conversion potential. Picture: realcommercial.com.au

Addressing Australia’s housing shortages

Another key driver in the increase of commercial conversions is the much-hyped current housing shortages. With demand for housing far outpacing supply, repurposing existing commercial buildings offers a faster and sometimes more cost-effective way to add to the housing stock.

“It’s a practical and efficient way to increase housing supply,” said director of WA-based Rezzi Strata, Nikki D’Agostino. “With increasing demand for housing in urban areas and limited land supply, repurposing underused or abandoned commercial sites offers a great solution. These conversions can breathe new life into buildings, reduce the environmental impact of new construction, and contribute much-needed housing stock without further urban sprawl.”

To further support these conversions various legislation and government funding initiatives are in place to make adaptive reuse projects more viable. For example, the Australian Federal Government has recognised the potential and importance of asset repurposing in its Housing Australia Future Fund Facility and National Housing Accord Facility initiatives with the conversion of non-residential property to residential dwellings as projects that are eligible for the funding.

“Government grants and incentives, such as those offered through the Building Better Regions Fund (BBRF) are also encouraging adaptive reuse projects, making them more financially viable,” continued Miss D’Agostino.

36 Gosbell Street, Paddington, NSW could be converted to a residential building. Picture: realcommercial.com.au

The potential to bag a bargain?

For homebuyers looking to get a deal, commercial properties can often be purchased at a lower price per square meter than residential properties, however, the cost advantage isn’t always straightforward.

“Converting a commercial property to residential use often comes with significant renovation costs,” explained Mr Costi. “Structural modifications, plumbing, electrical upgrades, and compliance with residential building codes can add substantial expenses.

“Saying this, for buyers who can navigate these challenges effectively converting commercial spaces into residential can offer strong value with long-term capital growth and rental returns.”

Navigating the zoning maze

Though this trend is a great way to help address the current housing shortage there are complexities involved in turning a boardroom into a bedroom. And one of the most significant hurdles is navigating the complexities of zoning regulations required for residential conversion.

“Rezoning a property from commercial to residential is a complex and time-consuming process,” said Mr Tropoulos. “While some areas already have mixed-use zoning (which allows for a more seamless transition) others require council approvals, planning applications, and potentially, community consultation.

“The ease of rezoning varies by location and local planning controls, with some councils actively encouraging adaptive reuse to address housing shortages, while others maintaining stricter planning controls.”

Properties with mixed-use zoning are easier to convert. Picture: realcommercial.com.au

Properties with existing mixed-use zoning offers a more streamlined pathway. However, these zones are not always readily available, and even within these zones, specific approvals may still be required that will take into account the impact on surrounding areas, traffic flow, and environmental considerations. It can be a bit of a minefield, so working with an agent that is experienced in commercial conversions is advisable.

“Changing zoning from commercial to residential varies by state and even suburbs, where each have their own regulations and approval processes which can be very complex, so having advice from an experienced commercial agent will help every investors make an informed decision.”

The future of commercial-to-residential conversions

Considering Australia’s ongoing housing shortage and evolving workplace dynamics, the only way it would seem for the trajectory of the commercial-to-residential conversion trend, is up. Additionally, rising construction costs and land scarcity make adaptive reuse a more sustainable and cost-effective solution compared to ground-up developments.

“The trend of converting commercial properties to residential is likely to keep growing, especially in high-demand areas where housing shortages are a real issue,” said Mr Costi. “It’s a smart way to repurpose underused spaces while meeting the need for more homes in capital cities.”

The trend of converting commercial into residential is likely to continue, as the need for housing increases. Picture: realcommercial.com.au

The current housing crisis is also likely to fuel further incentives and a relaxing in regulations — like ones seen in both the UK and US — to expedite the conversion process.

“There is potential for an increase in regulatory changes to streamline conversions,” finished Mr Tropoulos. “Broader policy changes at the state and federal levels could further incentivise developers. If governments prioritise housing supply solutions, we may also see more flexible zoning laws, faster approval processes, and financial incentives to facilitate these conversions.”