The office markets in Sydney and Melbourne have been one of the worst hit during the pandemic — with many offices sitting vacant, ideas of whether converting them into apartments would be a good thing surface.
Metropole Property Group CEO Michael Yardney said among the significant impacts of the COVID-19 pandemic was the flexible working from home trend, which reduced the office space needs of many businesses and corporations.
“While in the past more Australians traded space for place, wanting to live in the inner city where the action is and trading their backyards for balconies. Today, due to the ease and popularity of working from home, living in a city centre is slowly losing status,” he told Your Investment Property.
“This has led to significant vacancies in our capital city high-rise towers and a significant decrease in demand by both owner-occupiers and tenants and this is unlikely to change any time soon.”
Figures from Knight Frank show that vacancy rates in Sydney and Melbourne have been on the rise.
As of the July quarter, vacancy levels have risen to 9.2% for Sydney and 10.4% in Melbourne.
Based on current conditions, Knight Frank expects these rates to trend higher over the next quarters.
Turning offices into homes
In an interview with The Australian, Meriton founder Harry Triguboff, dubbed “high-rise Harry”, floated the idea of turning vacant offices into apartment blocks.
“Because we have devalued the city by having empty offices we must act quickly if we are to use existing offices for apartments,” he said in the interview.
There was no hesitation for Mr Triguboff to walk the talk, as he mentioned that he plans to convert some of his serviced apartments to residential units.
The only challenge, however, is council approval.
“We must forget overshadowing; we must just have new rules which will allow the old offices and serviced apartments to be used. The urgency is to rebuild the city,” he said.
While there could be merits to Mr. Triguboff’s idea, Propertyology head of research Simon Pressley said there are a lot of considerations to take.
“The dwelling structure is obviously there, but a conversion from office to residential requires installation of utility infrastructure for each and sound proofing, plus there are body corporate considerations,” he told Your Investment Property.
“I see no reason why it couldn’t be done, but I question the future level of demand for inner-city living, given that the primary driver in the past was working inner-city.”
Empty offices to empty homes
Turning office spaces into residential apartments would also have a wider impact on the housing market, as it would only exacerbate the current oversupply of units in CBDs, said Mr Yardney.
A report from CoreLogic showed that the highest growth in listings still seems concentrated in less desirable markets for owner occupiers, such as in the unit segment and across high investor-concentrated markets across Sydney and Melbourne.
“The larger issue is that many of the high-rise towers constructed in the past 15 years were built with little thought as to quality structure, many had poor floor plans and a large percentage were designed with overseas investors in mind,” Mr Yardney said.
Furthermore, Mr Yardney believes that most people, after having lived through a pandemic, would likely go for larger family-friendly apartments with balconies and outdoor spaces, something most office towers do not have and are impossible to retrofit into.
Outlook for apartments
Mr Yardney expects the overall property market to remain strong until the end of the year, as it continues to be buoyed by the pent-up demand.
However, he said the reopening of borders and the changes in migration patterns will continue to have an impact on where the market goes from the current conditions.
“While we are building many new houses in the outer suburbs, there are very few new apartment blocks on the drawing board, and other than the oversupply in the CBD, there will be an undersupply of well-located apartments for this increasing demand,” he said.
“With the gap between house prices and apartments never being so wide, it’s likely that affordability constraints will cause some home buyers to now consider family friendly apartments as a viable alternative as stand-alone houses are now beyond their budget.”
Meanwhile, Mr Pressley is not as optimistic towards the troubled markets of Melbourne and Sydney, saying that these two markets remain fragile to risks.
“As for high-rise apartments, they’ve been a problematic asset class for the decade prior to this pandemic and the pandemic adds an extra lower of concern,” he said.
Photo by Raj Rana on Unsplash