Two years ago, state and local governments pushed to fast-track conversions of near-empty offices into much-needed apartments to alleviate a housing crunch.
The promised panacea never eventuated.
Momentum to create homes out of empty offices has faded even as office vacancies rise and housing shortages intensify.
Developers have not submitted a single application to turn an office into housing in central Melbourne since 2023. Just one successful application has been made in the CBD of Sydney, the country’s most unaffordable city.
Towers have proven expensive to refit and landlords have instead kept their properties in the office market, awaiting either a return of workers or government funding to make conversions stack up.
One landmark 2023 study found Melbourne had 86 city office blocks ripe for redevelopment and converting just half of those would yield up to 12,000 apartments. The Victorian government promised to help facilitate the conversion of the offices.
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But commercial landlords have been dissuaded by the higher costs of conversion, according to Ingrid Bakker, who led the research as principal at architecture firm Hassell.
“In Melbourne, where there are a lot of buildings that are sitting quite empty, we still haven’t really got that sort of traction yet,” Bakker says.
Ingrid Bakker, principal architect at Hassell. Photograph: Gavin Green
The owner of one of the office blocks instead chose to lease to new commercial tenants after Bakker’s team found a refit of one of the 86 would barely break even for a developer, with an estimated profit margin of 0.05%.
“There aren’t any developers out there that go: ‘Oh yeah, that fits with my business plan, I want to make point-zero-something per cent profit,’” Bakker says.
No applications have been made to create housing in any of the other 80-plus towers, let alone the rest of the city’s 5m sq metres of CBD office space, according to the City of Melbourne.
Commercial landlords at the other towers identified in the proposal have instead refurbished the existing offices, continued leasing to business tenants or withdrawn properties from the market.
Costly conversions
Office vacancy rates have only gone up since 2023, hitting a 30-year high of 15% in July, while just 1.47% of the nation’s rental housing stock is up for lease – a record low.
Conversions have been slow to take off compared with other countries, including the United States and United Kingdom, where governments have eased planning rules.
Those reforms have sometimes allowed “slum-like” small flats to be squeezed into unsuitable wide-floored towers, without windows and lacking natural light and ventilation.
Australia has avoided loosening restrictions, meaning conversions remain more costly than starting from scratch, according to University of Technology Sydney professor of sustainable property, Sara Wilkinson.
“You might think because you’ve got the foundations, the walls, the roofs, the facades, it could be a fairly economical, fast way to get housing,” Wilkinsons says.
“But because of compliance with planning and building codes, it can be quite expensive, and you have to put a lot more … kitchens and bathrooms for each apartment.”
The sole successful application for conversion in central Sydney in the last two years is a century-old, eight-storey former warehouse in Ultimo, where the developer is planning to install 156 apartments.
A developer’s view of plans to convert an eight-storey former warehouse in Ultimo, Sydney into apartments. Illustration: apt.ResidentialAn impression of the exterior of the redeveloped building at 1-3 Smail Street in Ultimo. Illustration: apt.ResidentialThe projected skyline view from the rooftop of the Ultimo redevelopment. Illustration: apt.Residential
One other project is under consideration, a City of Sydney spokesperson says.
Some landholders have opted to withdraw their stock from the market and hope working from home becomes less popular, Wilkinson says. More than 60,000 sq metres of Sydney CBD office space is expected to be retired in the next five years, according to CBRE.
Others work to avoiding the obstacles of conversion by demolishing and rebuilding from a blank canvas.
Just outside the CBD, a 14-storey building has sat vacant since financial business MLC vacated in 2022. North Sydney council opposed plans to reuse the tower for a build-to-rent project and the developer, Investa, now plans to build commercial and education facilities.
Alex Stuart, director at planning firm Urbis, says office owners have looked at falling commercial rents and turned their mind to apartments, before seeing the cost of an adaptation – costs that have soared even higher as developers battle rising inflation.
“It was an opportunity to fill the gap, but now the construction costs have made it challenging,” he says.
Success stories
There are, however, some success stories, raising hopes that more near-empty offices will eventually be turned into homes.
A Brisbane tower at 41 George Street is being converted to 1,200-bed student housing, with developers turning the windowless middle of the office floors into gym, study and cafeteria spaces, according to Andrew Purdon, a regional director at CBRE.
“Student accommodation drives a lot of revenue through the [smaller dorms’] floor area [and] has an advantage over other forms of residential,” Purdon says.
If we want to increase the amount of office-to-residential conversions, we need to incentivise that, provide tax breaks or other mechanismsPhilip Oldfield
Government support has also helped individual cases get over the line: the City of Melbourne secured state funding to convert one of its warehouses to social housing, while a New South Wales government grant has turned a vacant office building in Penrith in western Sydney into temporary accommodation for young people at risk of homelessness.
Like Victoria, the NSW government put the spotlight on vacant offices as a way to boost housing stock in 2023, and NSW’s housing minister, Rose Jackson, says the government is still keen to help owners of empty offices explore housing options.
The Victorian government is also still willing to fast-track approvals to convert eligible commercial land into apartments, a spokesperson says.
But much more is needed to make projects stack up, according to industry expert Philip Oldfield.
“If we want to increase the amount of office-to-residential conversions, we need to incentivise that, provide tax breaks or other mechanisms, to make it more financially viable to savvy developers,” he says.
Allowing extra storeys can generate more home sales or rental income streams, with one project in Perth adding four floors to a seven-storey former Telstra office to make room for student dorms and a hostel.
Regulating carbon emissions from construction could push developers out of new builds and into conversion, Oldfield says, though tax changes and extra funding would be more direct.
In Adelaide, where individual renovations can receive thousands in funding, a wave of mini-conversions has started.
Inside a building in Gilles Street, Adelaide that has been redeveloped under the adaptive reuse city housing initiative. Photograph: City of Adelaide
Five new homes have replaced unused space in small office buildings and shops, while five more are on the way, at a cost of $170,000 so far.
A heritage-listed property on North Terrace in Adelaide is converted back into a home. Photograph: City of Adelaide
The city council and state government have collaborated to fund and fast-track projects, offering up to $75,000 per project plus extra for services and construction.
While the current pipeline of 52 projects has focused on small offices and shop-top refits, another 150 properties identified as potential converts and bigger projects are forthcoming, a City of Adelaide spokesperson says.
Those dedicated incentives for conversion projects are not on offer elsewhere in Australia, though Melbourne’s lord mayor, Nicholas Reece, has promised lower council rates, taller building heights and refunds on application fees.
With dozens of buildings sitting and waiting for new life, Bakker and her team at Hassell are still talking to state and local governments about potential support for Melbourne projects. She says there’s still hope.
“Everyone was very keen on this, and they still are,” Bakker says.
