Office conversions drive metro office rental growth

Government housing supply incentives and transport upgrades have also spurred on the increase in office repurposing. The trend is most evident in Sydney’s metropolitan markets, says Joanne Henderson, national director of research at Colliers.

“Things like the TOD, the Transport Oriented Development program, and also the HDA (Housing Delivery Authority) that’s really been driving, I think, owners to look at some of that secondary stock and what can be repositioned or redeveloped into other uses, particularly obviously residential,” she says.

“Across the Sydney metro there will be that withdrawal of secondary stock. There’s a sort of pipeline of potential withdrawals and that’ll mean there will be tenants displaced within that market that then could reabsorb into existing stock within that market.”

One such example is at 5 Blue Street, directly above the North Sydney train station. Under plans submitted to the NSW planning department, the building will be converted from a 13-storey office tower to a 15-storey residential tower containing 147 apartments. 

The building’s owner, Zurich, plans to install cafes and shops at ground level and reserve 20 per cent of the residential floor space for affordable co-living. 

Office-to-residential adaptive reuse is effectively moving stranded buildings from the market, and it’s only been gathering pace since the introduction of working-from-home rules, Henderson says.

“Prior to the pandemic period, most stock that was withdrawn, and that may have been smaller secondary buildings, was demolished and redeveloped into newer office towers or newer office stock,” she says. 

“That’s now completely flipped. I don’t think there are many that will be demolished that will then come back as office space. They’re all looking at residential, potentially some student housing.”

In North Sydney, the conversion of 255-259 and 267 Pacific Highway from offices into apartments will withdraw approximately 2400 square metres of C-grade office space. 

In its June quarter review of metro offices, Colliers research found sales activity eased with transaction volume totalling $145.1 million – a drop from the $1 billion recorded in the March quarter. Most of the June quarter sales were in Melbourne’s metro market, where $40.5 million of sales were recorded, including 11 Queens Road, Melbourne and 75 Moore Street, Footscray.

However, sales are expected to pick up in the second half of the year with several major Sydney deals now in due diligence. These include 558 Pacific Highway, St Leonard’s, 67 Albert Street, Chatswood and 90 Arthur Street, North Sydney.

The pipeline of new office buildings into all markets continues to be hampered by high construction costs; however, seven developments reached practical completion in the June quarter. Of all the metro markets, Melbourne’s fringe recorded the most development activity.

Colliers data recorded 41,000 square metres of new office space completed, including 33 Victoria Parade, Fitzroy (13,000 square metres), 120 Cremorne Street, Cremorne (12,900 square metres) and 120 Balmain Street, Cremorne (11,700 square metres).

Leasing activity across the nation’s metro markets bumped up in the June quarter with Colliers data showing there were 123 transactions – up 12 per cent from the previous quarter.

Occupier activity remained concentrated in projects of less than 1000 square metres, with an uptick in leasing demand from the 1000 square metre-plus segment. Thirteen larger-segment deals were completed in that range, pushing the average lease size to 645 square metres – the largest since the December quarter in 2024.