Residential Conversions A Balancing Factor For Sydney Office Market

According to the new CBRE ViewPoint report, residential conversions will keep the key Sydney key office markets balanced, providing somewhat of a counterbalance to weak occupier demand.

The report highlights that the overall outlook for the Sydney CBD and North Shore office markets is more balanced in comparison to other national markets - the differentiating factor being the trend to convert office space to residential.

CBRE Research Analyst Megan Pryor said confirmed residential conversions equated to 3.1% of total office stock in both the CBD and on the North Shore.

“This will keep those office markets relatively balanced over the next four years and by containing increases in vacancy, these residential projects will trigger a more responsive recovery for rent growth after 2016,” Ms Pryor said.

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sole panacea, the trajectory for rental growth and vacancy would certainly be weaker if these buildings were not being withdrawn and on our numbers the CBD vacancy could have been peaked close to 2% higher over the next few years.”

Sydney CBD Vacancy

CBRE’s baseline forecast is for the city vacancy to peak at 10.3% in 2015 with the addition of Lend Lease's Barangaroo.

In the absence of residential conversions, the peak would have been close to 12% in 2017. This improved vacancy outlook will also support a forecast rental recovery from 2017.

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

“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.”

Sydney CBD Prime Rental Growth

CBRE’s ViewPoint highlights that 154,090sqm of office space is being removed from the Sydney CBD for residential conversions, with a further 46,166sqm of office space being converted on the North Shore.

These include 14 buildings in the CBD - among them 115-119 Bathurst Street, 131 Macquarie Street and 130 Elizabeth Street - as well as six buildings on the North Shore, including 80 Alfred Street at Milsons Point and 504 Pacific Highway at St Leonards.

A range of other projects have been mooted, which would remove more than 75,000sqm of additional space in the CBD and close to 20,000sqm of office space on the North Shore if all were to proceed, representing 4.6% and 4.5% of total office stock respectively.

Office landlords will be the beneficiaries - not just on the leasing front but also from an investment perspective according to CBRE Capital Markets Director Simon Kasprowicz.

“Looking specifically at the North Shore, we expect residential conversions in North Sydney and St Leonards will have a positive effect on existing office space,” Mr Kasprowicz said.

“The benefits are twofold, 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.”

Mr Kasprowicz added that there was currently strong onshore and offshore buyer interest in the North Shore markets, with capital seeking both residential development/conversion opportunities and office investments.

“Particularly interesting is the increased volume of Chinese capital which is now expanding beyond the CBD with a mandate to secure both office investments and residential development sites,” Mr Kasprowicz said.

Looking at the CBD, CBRE Senior Managing Director James Patterson said the ViewPoint highlighted that residential conversion projects would help to keep a ceiling on vacancy rates over the next four years, during which time 463,000 of net office supply was being added to the market, 256,000sqm of that being in Barangaroo.

“Withdrawals for residential conversion during this period equates to 117,000sqm of existing office space,” Mr Patterson said.

“Without such high withdrawals, the market would be much more heavily impacted by this office supply pipeline. Similarly, on the North Shore 140,000sqm of new office stock is being delivered to the market during this period, including new projects such as 1 Denison Street and 100 Mount. However, this will be somewhat offset by the quantum of office space being removed for new apartment projects.”

An interesting case study is St Leonards, where the office market will effectively shrink, with 22,800sqm of space removed for residential conversions and only 15,000sqm of new office space added.