March 4, 2024 by Dymphna

2000 homes approved, but no one will build them

Office conversions are stalling. Did they ever make sense.

One of the most hyped ideas to come out of Covid was that we could turn all the empty office towers into residential apartments.

I was always a little sceptical about this. I mean, it sounds like a good idea. There’s an empty building and a lot of people who need a building to live in.

But having done my fair share of renovations, my head did swim a bit about how you were going to covert offices into apartments.

I mean, think about the plumbing. Offices tend to have centralised toilet facilities, with each floor following the same layout as the others to make the plumbing simple.

So at the very least, you’ve going to have to replace a centralised plumbing system with a distributed one.

As my plumber mate says, “That’s not going to be cheap.”

And that’s just the start of it.

Anyway, in a turn of events that isn’t all that surprising, those office conversions seem to have hit a stumbling block.

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.

I think those projects would have had pretty thin margins even before construction costs exploded during Covid.

But it speaks to one of the realities of the Australian property market – there’s no low hanging fruit.

There’s no easy way to bring housing to market at scale. There’s no land just sitting around that’s ideally suited to huge apartment towers.

It’s the reason why we’re talking about office conversions in the first place.

Australia is stuck with a housing shortage.

And its why house prices aren’t looking like slowing down anytime soon.