Why the winner from apartment developers reshaping Sydney’s suburbs could be office owners

Sydney’s suburban office markets will recover over five years as offices are converted into apartments and as companies shift back to areas with strong transport connections.

Markets like Chatswood are being transformed as developers convert offices into apartment buildings. Picture: John Appleyard

Sydney’s suburban office markets will recover over the next five years on the back offices being converted to apartments and as companies shift back to areas with strong transport connections.

While suburban markets have been hit by high vacancy levels and incentives paid to attract tenants have soared, key markets could benefit from the surge in schemes to convert ageing office buildings into apartment towers.

Real estate firm Colliers said vacancy levels were expected to fall to 8.7 per cent from the current 21.6 per cent, putting the markets on track to get back to pre-Covid levels.

Colliers said a mix of tenants reabsorbing into the markets and the withdrawal of mainly secondary office stock had the potential to add an additional 100,000sq m of net absorption, with a focus on markets including North Sydney, St Leonards, Chatswood, Crows Nest, Parramatta and Macquarie Park.

About 65 per cent of future withdrawals are for either build-to-rent or traditional residential projects, which have emerged as the best uses of these properties. The lack of new offices is also a factor as fresh projects are harder to stack up.

“Developers are taking advantage of this opportunity window to acquire secondary assets with upside potential before values start the cyclical upswing. They appear to be switching their focus to repositioning secondary assets to alternate uses as these are viewed as their highest and best outcome, with these properties often centred around key population growth areas and well located to major transport hubs,” Colliers associate director, office capital markets and investment services, Catherine Scott said.

“Flight to quality and elevated secondary vacancy in many metro markets has made repositioning for alternative use the most logical choice for developers looking at older office stock, with residential and other uses such as self storage, education or data centres now a viable alternative solution,” Colliers director, office capital markets, Alex McColl said.

About 76 per cent of office withdrawals between 2020 and 2025 were for refurbishment or redevelopment, but almost no new offices are expected over the next five years.

North Sydney and Macquarie Park are projected to be the markets with the most withdrawals, with about 14.5 per cent, or 136,158sq m, of space in North Sydney and 115,917sq m, or 12.3 per cent, in Macquarie Park to be turned over to other uses.

CBRE analysis showed that in North Sydney about 43,000sq m of existing offices is approved for conversion to residential, with a further 55,000sq m in the planning phase. If all approved, this would amount to a 9 per cent contraction of office supply over the next five to seven years.

Developers accounted for almost 80 per cent of mid-scale office purchases in Sydney’s suburbs over the second half of 2024 and were also a force this year.

Notable deals included GPT’s office fund selling 153-157 Walker Street to residential developer FreeCity, which has filed plans for a new complex.

Aqualand also sold two assets on Julius Avenue, North Ryde, to Wentworth Capital and Blackrock’s Life Science Fund.

In the inner city, 1-3 Smail Street, Ultimo was purchased by Apt Residential for adaptive reuse into build-to-rent.

Originally published as Why the winner from apartment developers reshaping Sydney’s suburbs could be office owners