Developers eyeing office-to-hotel conversions

Outdated office towers are being transformed into stylish boutique hotels as investors take advantage of high office vacancy rates and a well-performing hotel sector.

Office vacancy rates rose nationally from 10.1% in July 2013 to 10.4% in January 2014, according to the latest Office Market Report by the Property Council of Australia.

Older, more outdated CBD offices (otherwise know as B-grade or secondary stock) have been particularly hard hit. Reduced demand for office space and the desire for high-quality stock is making it difficult to find tenants for older-style offices.

Developers are turning this to their advantage by adapting well-located but outdated offices into new hotel space. It mirrors similar moves in the housing market, with more and more offices becoming inner-city apartments.

The hotel sector has been one of the best performing markets of late.

Gus Moors, National Director, Transaction Services, Hotels at Colliers International says “total returns for the hotel sector have outperformed most other asset classes over the last three years”.

“The most recent figures available from the Investment Property Databank (IPD), total returns from the hotel sector averaged 11.8% over the past three years, compared with 9.2% for retail, 9.8% for office and 9.9% for the industrial sector,” Moors says.

He says the lack of suitable, well-located land for new hotel builds is another factor driving the office-to-hotel conversion trend.

“With an increasing weight of capital chasing limited existing hotel stock and minimal new-build stock entering the market, investors and developers are now searching for new ways to bring hotel product to the market.”

All these factors make lower-grade CBD offices a prime target for hotel conversions.

But while many older-style offices suit conversion to boutique-style hotels, not all will work.

Key factors to consider include:

  • Location – hotels need to be close to attractions, public transport and be in a safe area of the city
  • Floor height
  • Natural light
  • Lift access
  • General access

There are also key factors to consider when choosing an office building for conversion to apartments.