Investors making a home in CBD offices

Investors are snapping up CBD office blocks to turn them into apartments, in a ripple effect of the nation’s strong housing market.

This emerged as a key trend in 2013 and industry experts are expecting it to continue in the year ahead.

Colliers Capital Markets & Investment Services Managing Director John Marasco says the buoyant residential market means residential developers are eyeing the office market for potential locations.

He says that in Sydney, 102,121sq m of currently occupied office space is earmarked for conversion to residential.

“The limited number of sites available for residential use across capital city CBD markets, combined with softer investor demand for older office stock, has seen domestic and offshore developers snap up secondary grade office assets that have the potential for conversion to residential or hotel use,” he says.

“Conversion of office space to hotel and serviced apartment use is also taking older office space out of the market.”

Looking back on 2013, office market specialists agree the year had its challenges – namely a lack of stock for sale, a weak leasing market and rising incentives.

But looking forward, they believe business confidence is higher as they head into 2014.

Knight Frank’s Managing Director, Commercial Sales, Paul Henley says sourcing appropriate office stock for local and offshore buyers was one of the biggest challenges in 2013.

But he says there was more activity in the last quarter of the year, compared with the year before, and expects 2014 to hold “continued yield compression, continued interest in purchasing development sites for residential stock, and continued capital flow from Asia”.

Jones Lang LaSalle’s Head of Office Investments Australia, Rob Sewell, says low business confidence had an impact in 2013.

“Corporate Australia was nervous,” he says. “Corporate Australia rationalised its cost base in order to protect margins. As a result, sub-lease availability increased.”

But Sewell believes confidence is improving and he expects leasing markets will start to stabilize in 2014.

“2014 will be the lowest year for supply additions since 2002,” he says. “There are new capital sources looking for exposure to Australian office markets. I expect the first direct acquisition by a number of these groups.”

Colliers Office Leasing Managing Director Simon Hunt says that while CBD office vacancies rose in the first half of 2013, and are likely to keep doing so, business sentiment is improving.

“Consumer confidence is trending up, CAPEX is increasing and housing demand is returning – all positive signs of a strong start to 2014,” he says.

“In the eastern seaboard CBD and Metro markets of Sydney, Melbourne and Brisbane, enquiry numbers are up by 29% when compared to the same period in 2012.”

“A low supply environment, combined with increasing enquiry, should result in at least a pause – and in some cases, increases – in effective rent reductions in the eastern seaboard markets in 2014.”