Can a brutalist redesign counter the scourge of empty offices?

Three office towers up for sale in a leafy Melbourne boulevard may prove the ultimate value test for a property sub-sector that still hasn’t recovered from the ravages of the pandemic.

The trio of buildings on St Kilda Road have come on the market at a time when the value of Australia’s office towers has been on a steady downward march and vacancy rates are still peaking in some cities.

A redesign of a brutalist building at 412 St Kilda Road by architects Gray Puksand is going against the soaring vacancy trend.Credit: Brett Boardman

Landlords across the country have seen the worth of their office towers plummet around 23 per cent on average over the last two years, Morgan Stanley analysts Simon Chan and Lauren Berry estimate.

That’s more than the 19 per cent drop recorded during the global financial crisis.

Melbourne’s office towers hollowed out even further at the last official count after vacancies jumped to 18 per cent, prompting the Property Council’s chief executive Mike Zorbas last month to urge Victoria’s government to get “some of its workforce back a few days a week to support what must again be a thriving city”.

“Of note, Melbourne still faces stiff challenges,” he said.

Muted tenant demand, high interest rates and the remote working trend have taken a big toll on St Kilda Road, but the redesign of a brutalist building at No.412 by architects Gray Puksand is countering the trend.

Vacancy on the boulevard, a majestic avenue lined with towers that skirts Albert Park Lake on one side and the Shrine of Remembrance on the other, was around 9 per cent before the pandemic. Now, it’s officially shot up to 27 per cent, although one agency, Colliers, puts it at an alarming 41 per cent.

That’s a challenging environment for property giant Dexus to sell into.

The national landlord is offloading an octagon-shaped building from its Dexus Wholesale Australian Property Fund at 636 St Kilda Road that it inherited as part of last year’s AMP Capital portfolio acquisition. Dexus thinks the half-empty building with a $60 million book value is better suited to a residential use and is marketing it as a development site through CBRE’s Trent Hobart.

Two other landlords are also testing the waters.

Big property owner, Australian Unity, is hoping to get close to the $62 million book value for its tower at 468 St Kilda Road. About 75 per cent occupied, the building is selling through Colliers’ Matt Stagg. Further along the strip, Edinburgh-based fund manager, abrdn, is also offloading a partially empty 13 storey office at 432 St Kilda Road which last changed hands in 2014 for $41.6 million. Its asking price is now “north of $35 million,” according to agents from JLL.

A white knight helping to boost tenant interest in the strip is the imminent opening of the new Anzac railway station about halfway along the boulevard. The underground interchange will ease congestion and spur development and amenity close by.

Architect Nik Tabain, national managing partner at Gray Puksand, said the recent refurbishment of an empty brutalist tower at 412 St Kilda Road, opposite the new station, showcased the possibility of “adaptive reuse” of older buildings.

The tower was home to Victoria Police for 44 years before it sat empty for a long period.

“Most commercial buildings have a 50 to 60-year lifespan, and much of the stock in major Australian cities is coming to the end of this window. This gives us many opportunities to breathe new life into these buildings and deliver innovative, contemporary commercial spaces designed to meet the current and future needs of 21st -century work,” Tabain said.

The tower at 412 St Kilda Road was home to Victoria Police for 44 years before it sat empty for a long period.Credit: Brett Boardman

The 17 level former VicPol office owned by SC Capital is now a rarity among its neighbours – a fully leased building.

It counts construction firm Hansen Yuncken among its occupants. Others signed up include Now Finance, Digital Cert, Chambers & Partners, Devcos and Chiodo Corporation, leasing agent Colliers’ Matt Cosgrove said.

Tabain said the design transformation included state-of-the-art amenities, new end-of-trip facilities, a business lounge and a cafe, and delivered 4200 square metres of leasable space by adding two floors at the top of the building.

Repositioning towers is an environmentally responsible and compelling solution to the challenge of high office vacancy rates, Tabain said. “No.412 St Kilda Road’s exceptionally high rate of occupancy speaks volumes about the value of repositioning in the current property market.”

Analysts Chan and Berry said they remain cautious about the office sector overall.

Conditions are likely to remain challenging for landlords until close to the end of this decade, but key metrics like vacancy and rising incentives are unlikely to deteriorate further.

“We believe that asset devaluations for this property cycle are coming to an end,” they said. “Whilst downside risks remain, it is likely to be far less extreme.”

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