Converting stranded offices into warehouses: Can it happen?

Can old office suburban offices, sitting idle and unloved, be converted into logistic hubs?

It’s a question occupying minds in the property industry as office occupancy dwindles and little used buildings face redundancy.

Some older buildings in Parramatta could be converted to warehouses near main roads.Credit: Ben Rushton

With the scarcity of industrial space close to high-density suburbs, landlords are looking at any adaptive re-use they can find, and lower-grade office blocks sitting on or near main roads are on their radar.

The e-commerce industry needs more last-mile delivery centres, but logistics space is tight. In the latest Property Council office reports, suburban vacancy – with the main areas being Parramatta in Sydney and Melbourne’s St Kilda Road – was at record highs of close to 25 per cent.

In Parramatta’s defence, there has been a lot of new office space opened, while St Kilda Road has seen tenants move to nearby Cremorne.

Underpinning the high vacancy rates for older buildings is the now-entrenched “flight to quality” – tenants moving from lower grade offices to smart new towers in the city centre.

“Suburban offices are often conveniently located near arterial roads and connections … filling the vacancies would boost occupancy and generate income for owners.”

Kristina Mastrullo, ResolveXO

CBRE office senior leasing director Chris Fisher said office space with high quality fit-outs
are popular with tenants seeking a flight-to-quality and a flight-to-value.

“Tenants are taking advantage of high incentives in the form of rent reduction to relocate to quality office space on favourable terms,” Fisher said.

ResolveXO’s head of research and property strategist Kristina Mastrullo said repurposing office buildings to last-mile delivery could work for some properties based on rental data.

“Suburban offices are often conveniently located near arterial roads and connections, ideal for last-mile delivery, and filling the vacancies would boost occupancy and generate income for owners,” Mastrullo said.

“While traditionally the office-industrial rental delta would exclude this concept from further thought, effective rents for both sectors in Sydney continue to converge.”

ResolveXO data shows industrial property at Mascot and Ultimo commands average net rents of $540 and $630 per square metre, respectively. In the office sector, net rents in average for older offices in Chatswood and Parramatta are $459 and $463 per square metre, respectively.

On the downside, Mastrullo said upgrading offices for logistics can be expensive, time-consuming and zoning changes or permit requirements could slow redevelopment.

In Melbourne, the significant gap between effective office and industrial rents makes the “office to logistics hub conversion” concept far more viable.

Older buildings along St Kilda Road could be converted into warehouses.Credit:

ResolveXO data said the average industrial rent for the city fringe is $172 per square metre compared to an average office rent along St Kilda Road of $502 per square metre.

Mastrullo said this raises a crucial question of what will become of Melbourne’s stranded office assets in the long term.

Franklin Shanks tenant representative Patrick Mainsbridge said the uncertainty of getting appropriate returns make conversions, from a landlord’s perspective, “a risky undertaking”.

“From the tenant’s perspective, landlords will likely try to recoup the capital works costs in the face rents or through reduced incentives, making it a tricky task,” Mainsbridge said.

“With access to roads and freight infrastructure being such a critical selection criteria for industrial lease inquiries, any asset repurposing must first prove itself as viable, in terms of transport access. More than 96 per cent of the existing Sydney office stock falls at this first hurdle.”

Property consultant and principal of Cook Commercial Investment Group, Michael Cook, said one of the problems is that some old buildings are held by families for generations without debt and vacancy is not such a big concern.

“An old building might be 75 per cent vacant, but the 25 per cent tenancy is enough to provide a decent holding income given the original acquisition cost,” Cook said. “Despite the negative sentiment, office is still probably the highest and best use.”

Mastrullo said comprehensive analysis is needed but with sustained high office vacancy rates, growing pressure on ageing office assets and the continued supply demand imbalance in logistics hubs, options beyond residential, build-to-rent or assisted living, “may be worth exploring”.

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