The evolving work landscape has led to businesses reassessing their office footprint, resulting in a decrease in office leasing. While the demand for A-grade or prime office space remains solid in some areas, older or subprime office buildings are struggling to fill their floors, with research showing a 6% decrease in demand from a year ago and a 24% decrease from pre-pandemic levels in cities globally. Some owners may consider adaptive reuse as a viable option to preserve the building, with popular options including hotel conversions, data centres and the office to residential conversion.
Repurposing office buildings into residential units is gaining traction worldwide as a solution to housing shortages. In New York, the Office Adaptive Reuse Task Force is focused on converting outdated office spaces into housing, aiming to create 40,000 apartments from unused office buildings. New data indicates that 250 million square feet of vacant office space in Europe’s top 35 cities can potentially yield 500,000 homes and Australia is in a similar position.
NSW office vacancy rates are currently above 13% and a recent study by the Property Council of Australia found that almost 90 Melbourne CBD office buildings are ‘ripe for adaptive reuse’, which could create up to 12,000 new homes in locations where amenity, transport connections and jobs already exist. In Melbourne the superannuation fund Australian Unity recently converted its headquarters into a seniors residential complex and the TNT Apartments towers at Redfern in Sydney were converted from a commercial space to 181 residential apartments.
Though the high costs and regulatory challenges have been a deterrent for investors so far, governments worldwide are incentivising such conversions, and policymakers are working to simplify regulatory obstacles, which will hopefully reach Australian shores soon. In addition, the depreciation deductions available on these office to residential conversions will also increase the investor’s cash flow.
Below is an estimate of the depreciation deductions that an investor might earn when converting a 1,200 square metre office space in North Sydney to 12 x 100 square metre residential units.
Each includes two bedrooms, one bathroom, a kitchen with modern appliances and a connecting lounge area.
Table 1. Depreciation deductions available
The depreciation deductions in this case study have been calculated using the diminishing value method.
As well as the depreciation deductions available on each unit in this office conversion, the investor will also be able to claim scrapping, which refers to the un-claimed or un-deducted depreciable value of an asset that is removed during a renovation. Below is a table of the scrapping that this client could claim on the office to residential conversion of this 1,200 square metre space purchased ten years before the conversion was done in 2024.
Table 2. Scrapping available on conversion of 1,200 sqm office space
To maximise the depreciation deductions on your office to residential conversion or to find out more about BMT and the additional services we offer, contact the team on 1300 728 726 or Request a Quote.