Residential conversions to reshape Sydney’s suburban office markets

Tuesday 05 May 2015

Residential conversions will remove at least 180,000sqm of office stock from Sydney's suburban markets over the next four years.

This will have place downward pressure on vacancy rates and in the longer term, lead to the virtual elimination of a number of smaller office markets. High concentrations of withdrawals had been identified in Epping, Burwood, Hurstville, St Leonards and North Sydney. 

It has been commented that limited greenfield sites are available in these areas, which has led to a notable number of office buildings being sold to residential developers. As a result of these residential conversion plays, we expect displaced tenants to be in the market for up to 50,000sqm of space in the short to medium term. These tenants are likely to look more established non-CBD markets, which will lead to downward pressure on vacancy.

Forecasts have predicted that the office markets of Epping, Burwood and Hurstville will shrink by more than 25% over the next four years as a result of stock withdrawals. In Epping, the market is expected to reduce by 34% (17,900sqm) over the next three years, following significant government re-zoning to encourage housing growth. Tenants including Unilever and the NSW Government have already relocated with Westpac tipped to follow following the sale of its current office at 12-22 Langston Place. 

In nearby Ryde, one-third of the market may be withdrawn following the sale of 19 Devlin Street, which is currently occupied by Centrelink. Burwood is meanwhile tipped to shrink by 25% (22,000sqm) with development approval for conversion projects at Burwood Towers and 2-14 Elsie Street. Current tenants in these buildings include Railcorp, Telstra, Pacific Brands, the NSW Government and Centrelink.

Further south in Hurstville, the office market could potentially decline by 35% over the next two years, with 34,000sqm of stock likely to be withdrawn. Major tenants expected to be displaced include the NSW Government and Centrelink. Over the long term it is expected smaller suburban office market such as Epping, Burwood and Hurstville to transition to predominantly residential hubs, while the North Shore markets will maintain a core office function with increased residential activity outside of the core.

Tenants expected to come to market as a result of residential conversion plays include a mix of State Government tenants, large corporates such as Westpac and Telstra as well as a number of smaller tenants many are expected to target larger suburban markets such as North Sydney and St Leonards - which will benefit from both this increased demand and the withdrawals that also occuring in these areas. 

In North Sydney, it has been indentified that at least 48,000sqm and potentially as much as 60,000sqm of stock is likely to be withdrawn over the next five years. A similar trend is apparent in St Leonards, where at least 35,800sqm stock is likely to be withdrawn - representing 10.3% of the current market. 

Some commented that numerous owners remain in talks with council in regards to development applications for potential residential conversions with a further 29,000sqm of stock currently mooted for withdrawal. As the overall market size declines, we expect that the occupier marekt willl continue to tighten, shoring up occupancy in remaining buildings and placing landlords in a more favourable position.

Highlighting this, data shows that if no withdrawals were to occur, total vacancy in St Leonards would peak at circa 14%. However, as a result of conversions, the current forecast is for total vacany to dip as low as 4.5% in 2017.

Source: Jagonal - June 2015

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