Sydney and Melbourne leading charge for residential development conversions

The anticipated plans for ageing office stock across Australia’s office markets is expected to vary, with Sydney and Melbourne leading well above commercial book value.

The findings are part of JLL’s latest Corporate Solutions Research report, The Wrap​. In Brisbane, the report found, a potential council program of incentives and support may be implemented to encourage the conversion of older stock to alternative uses. In Perth and Canberra, refurbishing, demolishing and redeveloping older stock for commercial office use could be on the agenda.

JLL’s Head of Integrated Portfolio Services for Australia, Tony Wyllie, said, “We’re calling 2014 the year of the ‘Push-Pull Market’ due to the curious disconnect between the current tenant-favoured commercial leasing markets across Australia’s capital cities, and the continued high demand for good-quality commercial office buildings at historically high prices.

“There are a range of macro-economic factors contributing to the ‘Push-Pull Market’, including the competition to purchase high-grade assets from both local institutions and increasingly from offshore investors and sovereign wealth funds.”

According to Mr Wyllie, such demand is in turn fuelling new development activity which is expected to flow through to a continuation of good opportunities for tenants.

“Adding further impetus to commercial development is the push, led by both Sydney and Melbourne, for residential developers to acquire well-located secondary commercial buildings for future residential development, at prices well in excess of commercial book value.”

Mr Wyllie said the move away from the current tenant-friendly conditions appears some way off.

Sydney and Canberra

JLL’s Head of Tenant Representation for NSW and ACT, Gavin Martin, said Sydney’s strong appetite for residential conversions will continue to maintain a balance of oversupply by absorbing excess older-style stock.

“Over $1 billion of commercial property has been purchased in the last year, with the intent to redevelop or convert the site for residential use.”

According to Mr Martin, Sydney is leading the charge across Australia in adopting new workplace styles to achieve more with less. “Unless large corporates have a valid reason to move, they’re deciding to stay, with many working more efficiently in less space.”

In a similar story to Sydney, in Canberra’s commercial office market any move needs to be justified by productivity gains.

“If an existing fit-out works and the size of the space is appropriate, then the likelihood of a renewal will be higher than that of a move.

“Ageing stock in Canberra is likely to undergo a similar cycle to the refurbishment and demolition that other states are currently experiencing; however it may not come to fruition for years due to slower demand,” Mr Martin said.

Melbourne

“Like Sydney, Melbourne’s ageing buildings within the CBD have landlords questioning how best to treat them in order to stay relevant and keep the buildings occupied,” said JLL’s Head of Tenant Representation for Victoria, Peter Walsh.

“For occupiers, this is a positive as it means landlords recognise the way occupiers work, and what they expect from workplaces, is changing – and they need to keep up with expectations.

“The adoption of new work styles and increased demand for higher-quality amenities such as end-of-trip facilities, conference facilities and business clubs, certainly hasn’t ruled out consideration of ageing stock,” said Mr Walsh.

Brisbane

Approximately 44 per cent of Brisbane’s CBD office stock is now classified as B-grade, which is the highest of all major capital city markets, compared with a national average of 27 per cent.

JLL’s Head of Tenant Representation for QLD, Michael Greene, said, “With the demand on buildings drastically changing in the last five years, much of the older stock built in the 1960s, 70s and 80s is finding it hard to remain relevant in the leasing market.

“A debate has started locally in regards to Brisbane’s ageing stock, involving the State Government and Brisbane City Council, about whether a program of incentives and support should be implemented, to encourage the conversion of older stock to alternative uses.

“The good news for occupiers is that this excess stock continues to push rents down and incentives up,” Mr Greene said.

Perth

According to JLL’s Head of Tenant Representation for WA, Andrew Campbell, Perth has the greatest amount of buildings over 20 years old in surveyed areas of CBDs across Australia.

“Due to a number of influencing factors, including recent zoning changes with increased plot ratio allowances in the CBD, this ageing stock with large vacancies is more likely to be completely refurbished, or demolished and redeveloped, rather than converted to residential – as is being seen in other capital cities,” Mr Campbell said.