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Middle market office assets are increasingly bought with repurposing in mind, as the country continues to grapple with the future of the traditional office.
A report from Colliers has found that 21 per cent of office middle market sales in 2023 between $10 million and $150 million were purchased with the intention to rebuild or repurpose the building to better leverage demand for quality.
As market conditions tighten, investors are turning to alternative strategies to extract as much value out of their assets as possible.
Residential development is a popular choice for office owners, with 25 per cent of office buildings traded with repositioning in mind opting to add homes into the mix.
Meanwhile, 13 per cent are planning a mixed-use development that combines residential and retail opportunities, while flexible workspaces and hotels are other popular uses.
Matthew Meynell, managing director of investment services at Colliers, stated: “Owners recognise that the demand of the office experience has changed, with tenants expecting the latest in technology, sustainability and lifestyle.”
“With this in mind, it’s no surprise that a significant portion of new owners of lower grade properties have opted to reposition or rebuild their assets, allowing them the opportunity to upgrade to a premium level to keep in line with what is required to remain competitive in this market,” he said.
Along with the “flight to quality” trend, rising attention on ESG considerations is also shaping investor strategy in the office market.
“We’re witnessing dynamic growth in adaptive reuse strategies, with investors seeing the potential of C and D grade stock, looking to transform it into a more profitable and desired use like residential, hotels, student accommodation and seniors living to take advantage of the high demand for these sectors,” said Meynell.
Based on 2023 levels, Colliers predicted a total area of 52,000 square metres will be used for alternative uses this year, with most of this upcycling activity concentrated on metro and fringe markets.
Catherine Scott, associate director of investment services, explained that the implications of this trend on Australian office stock would be largely positive.
“In the long run we expect the impact to not only be highly beneficial to the office sector, but also the CBDs in which this occurs,” said Scott.
“Adding more residential, hotel and other accommodation elements will form better economic diversity, with a greater mix of workers, tourists and residents. This in turn creates a more well-rounded economy which is positive for a broad mix of business sectors,” she stated.
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