Sydney’s office-to-housing conversions that can’t get started
Thousands of new apartments planned in the Sydney CBD have been delayed or cancelled with rising construction and financing costs making real estate developers increasingly nervous about converting office towers into units – even after the projects have already been approved.
Some office blocks have been waiting for six years for conversion, delaying hundreds of apartments in the area. Alex Stuart, the director of research house Urbis, which conducted the analysis, said buyers were also less willing to pay high prices after an increase in interest rates over the last two years.
“Launches have slowed down because market confidence has been slow the past 18 months from interest rates going up and challenges around construction quality,” he said. “A lot of these projects which received approval from a certain feasibility three or four years ago now don’t stack up as well due to what’s been happening.”
Construction costs have risen as much as 40 per cent since the COVID-19 pandemic, while the majority of financiers were only lending to off-the-plan apartment projects if they received pre-sale commitments for more than two-thirds of the building.
In Sydney’s CBD, there are nine commercial-to-residential redevelopments that have approval but have not advanced to construction. At least another two residential projects have not advanced, or are stalled to the point where approvals expired. If these projects were to go ahead, they would create more than 2000 new homes in the heart of the city.
Some of those projects are more likely to proceed than others, such as Mirvac and Coombes Property’s 507-apartment tower and Event’s 115-apartment block above the George Street Cinemas that will stand alongside each other if completed.
But others have languished as unloved offices for years. These include Han’s Holdings office tower at 338 Pitt St, which received approvals six years ago to become a 592-apartment tower, and Shimao’s near-vacant 175 Liverpool Street office was envisioned to eventually be replaced with a 226-apartment project in 2019.
Stamford on Macquarie’s residential redevelopment plans – approved for development in 2020 – were also put on ice until it was sold in mid-2022 to JDH Capital, which acquired the site with intentions to revive the plans. A similar revival of redevelopment plans unfolded at ADC House a year later, which has had its residential approvals tweaked around for almost two decades, when Gurner Group acquired the site for about $200 million.
Charter Hall, meanwhile, decided not to proceed with Dexus’ plans to turn the 201 Elizabeth Street site into a 53-storey mixed-use hotel and apartment complex, when it purchased the site for $630 million from Dexus about four years ago. But Charter Hall late last year decided to keep its options open by seeking to get the residential development approval reissued, having already gained approval a year before for an $85 million makeover of the same office tower.
Urbis data indicates only one approved Sydney CBD residential redevelopment was undertaking pre-sales – Deicorp’s 168-apartment project that will replace the Polding Centre building, which was formerly owned by Catholic Archdiocese of Sydney.
Residential projects under construction are mostly overlooking the waterfront in Barangaroo, Circular Quay and Darling Harbour, with the exceptions being the former David Jones Building, the Tattersalls Club and a tower that will sit above the new Sydney Metro Pitt Street Station.
Deicorp executive Rob Furolo said one of the factors that made jobs like the 168-apartment CBD project viable was that the company acted as both the builder and developer, which made it easier to manage costs and minimise disputes.
The slowdown has also affected the Sydney CBD fringe. Since 2018, across the entire City of Sydney, the number of units in the approval phase had risen for five consecutive years until last year. Last year, the number of council-approved large project apartments fell 9 per cent year-on-year to 5810.
Those lower approval numbers were expected to remain throughout 2024 as the number of development applications being submitted has declined as the feasibility of projects becomes more difficult. The number of units that lodged application in the City of Sydney declined 35 per cent year-on-year to 997.
No easy fix
The slowdown in commercial to residential redevelopments provides a fresh challenge for the federal government’s target of building 1.2 million new homes by 2029, or about 1.2 million a year. At the state level, NSW has a goal of building 375,000 over the next five years, or 75,000 annually during that period.
Michael Cook, a former Investa executive who now runs his own real estate consultancy, said the effects of the housing crisis run deep within Sydney’s CBD and that only improved economic conditions would provide the fix.
“What is the solution to the problem? Firstly, don’t blame the planners, it isn’t their fault that the numbers don’t stack up. And it isn’t the fault of the council or the state government,” Mr Cook said.
“This is Economics 101. When demand and pricing reaches the point when it is economically viable many of these projects may start.”
City of Sydney lord mayor Clover Moore said the council was considering providing incentives for developers to start more build-to-rent developments to counteract the slowing apartment pipeline. The local government area changed its rules in December – reforms which require state government approval – to grant developers 20 per cent to 75 per cent more floor space for designated build-to-rent accommodation.
“We have a backlog of strata residential approvals awaiting foreign investors to return. These projects have stalled,” Ms Moore said. “That is part of the reason we have begun providing incentives for built-to-rent projects – to create additional housing stock in the city centre that will not sit empty awaiting foreign buyers.”
