Talking Property | Reimagining Australian office buildings

KH:
Hello and welcome to CBRE's Talking Property podcast where our team of experts, our clients, and industry specialists share insights into the way we live, work, and invest through the lens of commercial real estate. I'm Kathryn House, CBRE's Australian Communications Director, and I'm your host for this latest Talking Property episode. Today we'll be talking about adaptive reuse: in a nutshell, the potential to convert empty or obsolete office buildings into other uses. It's a really hot topic right now amid Australia's housing crisis, given the scope to reimagine some of these CBD offices as apartments. And it's not just residential uses that can be considered at a time when office vacancy rates are at the highest level since the 1990s. For instance, a York Street office building in Sydney recently sold for $52.5 million with plans for an upper scale hotel conversion. This follows the unveiling of luxury hotel Capella Sydney, a leading example of adaptive reuse involving the former Department of Education building. 

Meanwhile, in Melbourne, Australian Unity has repurposed its high-rise headquarters into a premium assisted living and aged care complex, which has just been completed. Repurposing office buildings aligns with the race to net zero, given the much lower carbon emissions involved compared to, say, doing a knockdown and rebuild. And proponents are also heralding adaptive reuse as one way to create more dynamic 24/7 cities. So to talk about the opportunities, the inherent challenges, and how to accelerate change, I'm delighted to be joined by the Principal and Commercial & Workplace Sector Lead at Hassell Ingrid Bakker, the Executive Director of Business NSW David Harding, and to give us an international perspective by Zoe Bignell, head of CBRE's UK Development Advisory Business. Thanks for joining me today. 

So Ingrid, Hassell recently completed a comprehensive audit of the Melbourne CBD on behalf of the Property Council of Australia. The study identified that 86 buildings are ripe for adaptive reuse and could create up to 12,000 new homes. Can you tell us a bit more about what the study uncovered and how much of an impact do you think adaptive reuse could have in addressing the current housing issues in Melbourne and other major Australian cities? 

IB:
Yeah, thanks Kathryn. We started this study mainly because we were looking at a particular B grade office building and we were working with a developer to try and attract a tenant to that building and we did a whole lot of work to make sure they were going to finish, and it was all going to work. And then the services engineer came in and said, if we're going to meet their Green Star requirements and their NABERS rating for energy, we're going to have to completely replace all of the services and that's going to cost a gazillion dollars. So it kind of made the project fall over and that got us thinking about, well what happens to these buildings that aren't able to be upgraded to A grade or premium grade office, but they can't just be sitting there empty either. So that got us really thinking about what those buildings could be. 

And this particular building just happened to be exactly the right sort of scale and dimension to suit apartments. And that's the key. You hear a lot of people saying you can't convert offices because the floor plates are too big and it's too deep and you won't get enough natural light. And that's true, you can't with a lot of office buildings. But this particular building was around 24 metres wide, which is kind of perfect for getting two apartments complying with the Better Apartment Design Standards in Victoria or the A D G in New South Wales. And I'm sure there's other apartment guidelines all over the world that are similar that have a maximum distance of window to rear wall of the apartment of being nine metres. So if you do two metres of balcony, nine metres of apartment, two metres of corridor, nine metres of the other apartment, and then the balcony again, you get this magic number of 24. 

So then we started thinking, well, I wonder how many other buildings there are in the city that are around that sort of dimension that could work. And I thought there might be half a dozen. And that's when we did the audit and found there were 86 of them, then we kind of discounted that some of them wouldn't work because they might be jammed up between other buildings or just not have great access to natural light. So then we thought, well if we just assume that 40 of those 86 buildings could be converted, and each site was roughly yielding around 250 to 300 apartments each, that then gave us that number of 10,000 to 12,000 new apartments in the city. And that's when we started to understand the scale and potential and what that could do to the city to really add some life, particularly in some of the areas where it's got a bit sort of quiet and scary and the retail's struggling and all of those things. 

So the key to activating cities is having that 24/7 city and that passive surveillance that residential gives you to keep it safe. And that's what we thought. This is a great opportunity to really revitalise the city. We've definitely been having those conversations in locations all over our practice and everyone's been really interested in it. So we are looking at some case studies in Singapore. In Brisbane, we've been talking to a lot of people in Sydney as well. And I was recently in Perth and the conversation was quite active over there as well and also in San Francisco. So, it depends on the planning conditions in each city. And some cities obviously allow more height or more density than others. And that's something that we're looking at as we move through the different locations to see whether this can work in different cities. 

KH:
So Zoe is the same push for adaptive reuse happening in London. I heard you talking recently on a podcast with The Economist about some London office space being converted into laboratories given the growth that's happening in the life sciences sector. 

ZB:
Yeah, it's really interesting actually because a lot of what Ingrid has just been describing is chiming with what's happening over here in London. I mean, inevitably we know that the real estate office market is cyclical, but occupier preferences at the moment is really leading to a polarisation in our market with a flight to quality. And what this is doing is hastening obsolescence of a growing proportion of our market, particularly secondhand office space. And there are three core reasons for that. One is the pandemic, we are embracing hybrid working and when we go to the office, we want it to be different. We want it to be a home away from home. Secondly, a lot of the larger corporates, particularly in London, the highest occupational requirement on their agenda is green sustainable space, environmentally friendly space. And that's true of funds as well and landlords. 

So space that doesn't have that is becoming vacant. And also there's lots of regulations coming into the UK Energy Performance Certificates that are required with office buildings and secondhand buildings. It's very expensive to get those buildings up to space. So inevitably it leads landlords to think about, well, how can we repurpose these assets because we are being precluded for affordability to transform traditional offices into offices. So what else can we do? A lot of what I do now is not thinking about demolishing a building and rebuilding. It's about how can we repurpose whether that's for residential hotel or life sciences. Life sciences in London, particularly are a growth sector. And a couple of years ago, life science occupiers had a very narrow view on the type of accommodation they wanted and they'd only go into new build. But the market and the conversion market's become much more sophisticated now. 

And there's lots of evidence, particularly around secondhand office buildings where you are near transport hubs or where you are near centres of excellence, for example university colleges or hospitals where you could create that knowledge ecosystem. There's, if you've got a secondhand office building, occupiers are willing to work with the landlords to convert that into life science abled space. But you know, one thing I would say is secondhand space. I mean it's double what it was pre pandemic. So it's quite heightened in London at the moment. But not all office space can be converted to an alternative use even if there is a willingness because there are other factors in play - planning, affordability, as Ingrid was saying, it's can the building be readily adapted to an alternative use. Access is the key thing in London because unless you know where you live somewhere, you need to be able to access your place of work very readily. And so a lot of the space that's redundant is in the outer parts of London where you may be relying on one piece of public infrastructure rather than a neglected mix. 

KH:
David, I know adaptive reuse is a topic you are particularly passionate about to help Sydney become a 15-minute walkable city. Can you tell us why you think that's so important and the role you think adaptive reuse can play in creating true 24/7 cities? 

DH:
I've been listening to Ingrid and Zoe and I'm really just agreeing with absolutely everything they've said. Smart cities have been hedging against totally office bound CBDs ever since the smartphone was invented, ever since we got rid of paper, all kinds of things were leaning against this kind of dial or movement of everyone to go to the office and everyone to go home at night. And that over time has been moving us away from this concept of a 45-minute commute, an hour commute, an hour and a half commute being a reasonable way to spend your day to this 15-minute walkable city. Of course, actually what we want is a city that's full of the laughter of children, the barking of dogs, all of those things that make a lively and atmospheric and revived and active and safe city, work is not just a place full of empty towers at the weekend and suits during the week. 

So if we accept those as facts, then we ultimately come to a point where we say, how do we mix up our cities? How do our cities that work 24/7 be created in a space that only work nine till five Monday to Friday for so many decades? And some cities of course have been dealing with this a lot better than others, for a lot longer. Ingrid talked about Singapore, or Singapore I think going back eight years or so now, instituted a review of no less than 6,000 towers. They were looking there to improve their credentials when it came to environmental factors, but also putting in an almost ban on towers being knocked down. The premise was that all towers could be repurposed or improved in one way or another. We're a long way behind that in Sydney. We're a long way behind that in Melbourne, but certainly London's out there. 

Zoe absolutely is at the heart of a city that's repurposed towers for many decades. But ultimately behind all of this is the need for reinvestment. We can't just sit there and look at our lower grade towers that come either knock down and become empty spaces in our cities. We need to reinvest in them. We need to revalue our cities in more ways than one. We need to, as I say, bring all of the generations back in. We need to have them pumping all the way through the weekend. We need to have people in the streets through the night in a safe kind of environment. And for that we need to have more mixed-use towers. They don't need to be all residential, you know, so Zoe’s made some really good points there around that in London. Ingrid said, if you've got very big floor plates, you can't use them for residential. We're proposing from Business NSW, and we've been on this for a long time, that we just need to lift the planning regulations to allow invention, to allow innovation, to allow that reinvestment to come in and whether it's educational space, whether it's medical space, whether it's research space, whether it's advanced manufacturing, whether it's luxury housing or whether it's affordable housing for key workers, we need to look at them all. 

KH:
So this is a question for all of you. Do you think planning is one of the biggest hurdles here? 

ZB:
I mean look, to be fair, the planning, the local planning authorities here in the UK are trying to mitigate the housing crisis and it is a housing crisis over here and we have something that's called permitted development. So secondhand office buildings and you don't have to get planning to convert those spaces into residential, but there are area thresholds and it's 1,500 square metres, so only very small buildings that can circumnavigate that the planning system so to speak. But it has worked, I mean since 2015, 2016 when permitted development came in, I think there's been something like 21,000 homes that have been delivered. But lots of those are small scale and what we're looking at or the regulatory bodies are looking at now, is increasing that threshold to 3,000 square metres. And again, that will help expedite, I mean I've got this fact in the back of my head that in the US for example, 89 of the office to multi-family conversions that have happened of an average building of 185,000 square feet. 

So it gives you a sense that it can happen if you increase the thresholds. The reason why the 3,000 square metre threshold isn't coming quickly is because we have affordable housing needs in the UK, which is really important for social housing and to create that mixed use balance of user that David was just talking about. And there's a concern amongst the government and local authorities that if you increase the threshold, then you're going to be mitigating the amount of affordable housing you can bring in. And that's really important for affordability purposes. The other, I mean whilst yes, the local planning authority are trying to help, we have something that's called commercial activity zones in London particularly. And so local authorities want to protect employment uses in those central activity zones. And there's a concern that if the use flips from employment to residential, but yet the office, the employment cycle comes back and there's more demand for offices, have they mitigated their ability to respond to that in the future. 

So there's this real conundrum around trying to expedite housing to deliver on that housing crisis, but also not be in a position where you have a future growth where employment growth may go to in the future. And I get it, I understand it, but housing is so, and the crisis here is so rife. I think that the right compromise is unemployment because we have some clusters of office space that works really well. We have regeneration sites in London where you can weave in commercial accommodation to help bring in that employment level necessity. So it's all one of balance. It's not easy. But I think my main theme at the moment in speaking to these regulatory bodies is you've got to have a balance and there's not one size fits all approach to planning that's going to work. You need to be agile and respond to what developers and what end users want. Because the most important thing here is not having buildings that are obsolete because that stymies your high street or your townscape. 

IB:
Yeah, I totally agree Zoe. And one of the most encouraging things that's been happening through this piece of work that we've been doing is we've been having some great discussions with government about the potential of this adaptive reuse and they have been incredibly keen to understand what do they need to do to unlock any potential issues or to get rid of hurdles. So we've had some great round table discussions with City of Melbourne and Department of Planning to really explain and talk through some of the key issues. They're open to discretion around some of the current planning codes and also to the apartment design guidelines and looking at each site for its merit. And we did a couple of examples to show what would happen if you complied with the current planning scheme and then what would happen if we had some discretion and we were able to demonstrate that you'd get much more efficiency, a better building, you know, if you did have that discretion. 

So that's been really encouraging and I think, there's a housing statement about to come out in Victoria from the government all around exactly the same. We've got a housing crisis here too, Zoe, I think it's pretty much a world issue, but we understand that there is going to be an allowance in there or an understanding that adaptive reuse is one of the answers too. We're not saying it's the only answer, we just say it's one of those answers. And I think to Zoe's point before, what we've found when we looked at these buildings that would be great for adaptive reuse, that was only six and a half percent of all the buildings that were built before 1990, all the office buildings. So there's still a lot of office buildings that are available for office workers and for that employment. You know, we're not saying let's convert every office building in the city to houses. 

It's a small proportion but then can generate quite a large number of apartments. One of the things that we also looked at was that around that 300 apartments in a building tends to be what the build-to-rent model is based on that they sort of need a critical mass of around 300 apartments from an operational perspective. So we think the build-to-rent model can also be a great way for some of the institutional investors to get involved in these sorts of products. Given that the commercial market is going through its sort of downward dip at the moment. 

KH:
David, are you seeing the same willingness to consider planning concessions in Sydney? 

DH:
Yes. Look, I think, there are more issues than just planning. We see in Sydney that we need to have a meeting of minds between state, local government, developers themselves, operators, and of course the finance behind. The key here is that we need to have at this reinvestment, revaluation for a lot of our stock that requires not only new money, but new thinking, new thinking from the planning departments, which need to think outside of the constraints that they've been working on for the last 20 or 30 years. It's a finely tuned machine in Sydney. Certainly, it's been very successful for decades to build the wonderful harbourside CBD that we've got, but the fundamentals have now changed and we have to  adapt to that. So planning is absolutely key, but alongside the planning, we also need to be able to bring different valuation models forward before they've been proven. 

So valuations are a really key area. If you don't know what a building sells for, how do you value it? This needs to be dealt with alongside a very much more open view of planning. Of course safety codes and all these things needs to be taken into account, but the old-style zoning which says here be commercial and here be housing is certainly very, very outdated. Even here be industrial usage in the modern era is completely different from how it was when the planning rules were written. So we absolutely kind of welcome what's going on in New South Wales with a new look at planning. We think it'll open things up, but the market must move as well. Some is the money. We have to realise that mixed-use towers don't make you such a quick buck. They do make you a different kind of a buck. It takes a lot longer for that money to come through. It's a lot safer, it's a lot more resilient in the long run, but it runs slower and lower as far as returns to concerned. All these things need to come together because otherwise we're just going to get wrecking balls in our city. These older towers are just going to get knocked over. 

ZB:
Yes, I completely agree with David there and it's the balance point, isn't it, that I think that what I'm hearing is that there's a willingness amongst the planning authorities to support housing delivery. And that is absolutely true here in London, but that's only one piece of the jigsaw because there are pressures around supply chain, there's construction cost escalation, there's higher borrowing costs, there's removal of what used to be helped by schemes here in the UK. So government has also got to come to the table alongside planning authorities and collectively discuss and all ease that word compromise or incentivisation that can start to expedite and give developers the confidence to deliver because it's affordable so to do. And also it's affordable for the likes of us to buy these units. And this comes back to your point, David, around affordability and running commercial financial appraisals to make sure you've got that cost return balance right. 

KH:
It's an interesting point around just how much intervention do we need here, such as say tax incentives. We're seeing certain cities around the world really come to the party on this front. I was reading about a task force in New York calling for legal and regulatory reforms to increase conversion opportunities, the City of Chicago offering developer subsidies and California passing legislation to facilitate adaptive reuse. So is that intervention and incentive piece just as important as planning, do you think? 

DH:
Well, I think in, in the Sydney scenario it is. I don't think that government coming out with an open checkbook ever is the best way to drive innovation. I think government empowering this revaluation, this reinvestment by making the rules applicable to the age that we live in is probably more important. But I certainly wouldn't be against incentives for smaller businesses to co-locate back into CBDs to challenge that kind of donuting effect. And where it comes to say key worker housing, which is a terribly big problem for most of the cities in the world. Absolutely. Why doesn't the government get behind it? We certainly should be talking about it as though it's a need that we need to deal with right now. And if people did want to put in temporary incentives, tax breaks and the like to get the ball rolling, then that's great. Obviously in the long run, if government needs to shore up the model, then it isn't working, it's not the right model and we need to go back to the drawing board. 

KH:
And Ingrid, I think you were going to say something before as well. 

IB:
Yeah, totally agree with David, but I think one of the key things is actually a value being put on the carbon, the embodied carbon that's in these buildings. If we can value that carbon and there's some kind of reward or incentive or tax break or whatever you want to to call it for the developers that choose to reuse the existing concrete in a building. And that embodied carbon has some kind of value,  because at the moment it doesn't. And when we've done the feasibilities on our case studies, they don't stack up straight away. We're doing a whole series of tests with a couple of our developer friends at the moment to see if you got some kind of uplift and we're able to build lightweight storeys above the existing building to increase the yield, would that then tip it over to being something that would stack up? And that's something we're testing at the moment. But I think until there's some kind of value put on the reuse of the structure, we'll be in an uphill battle. A lot of the cities around the world and Melbourne's got a very aspirational target of net zero by 2040. We're not going to get there if we don't reuse the embodied carbon that we've already got. 

KH:
One final question, and I know we've covered a lot of ground today, but I'd love for each of you to name the one thing that you think would help accelerate adaptive reuse in our cities. 

ZB:
I think it's agility amongst the local planning system here. And you know, we have local plans, but sometimes a one size fits all around policy, it just doesn't work. One thing I would like to weave into this conversation is that a number of our local plan authorities where there is an office building, they don't insist, but we have a policy that states that you need to market a building for 12 or even 24 months to demonstrate there's no demand from office occupiers. Now 24 months is a very long time, and by that time, you know, the residential developer that has an idea for that building has moved on to something else. And so the opportunity's lost. So I think as, as I say, coming back to this point of being agile at a point in time where there is this appetite amongst a landlord or developer to introduce residential, that they can respond to that quickly and that which may mean that there's a need to compromise on policy, but because there's a wider socio economic game attached to it. 

IB:
Yeah, I probably went a bit early. I think the value on carbon is the key, but if I have to say another one, I think collaboration between all the different parties. So government, you know, the planning departments, the different city councils and the developer sector, you know, everyone that's involved really need to get behind it. What I'm trying to get generated in Melbourne is a live case study. So trying to find a building that we can get behind and test some of the potential hurdles. One of them we know is also going be around the building codes. So, the building codes aren't really designed to work with adaptive reuse. And that's been some of the experience already in some of the adaptive reuse projects, that there's no building code. So it'd be great if the building code can sort of adapt to suit. But yeah, I think collaboration, if everyone can work together, we'll get there. 

DH:
Well, for me it's a couple of things. I know you said one thing, but it really is this rezoning major portions of our old-style CBDs into a new definition of mixed use. We need to lift the lid on the innovation, let the investment come back in, let the creative people like Ingrid loose, with much less constraints in a world that needs to be much more nuanced, much more resilient and frankly bring a lot more colour to our towers. And the second thing that you probably are not going to allow me to do, but I'm going to do it anyway, is a transformer tower competition here in Sydney. We are going to be helping with a competition here, a design competition involving young architects, young engineers, and indeed young building management to look at our towers that we've got here in Sydney that are facing the wrecking ball and come forward with the best designs to transform those towers into something that are beautiful, useful, resilient, and frankly, environmentally sound for the generations to come. We're going to call it Transformer Tower and we hope you can all join in. 

KH:
Thank you so much for your time, Ingrid, David and Zoe. It's going to be interesting to see how this all plays out, but it does seem inevitable that we'll see a growing number of adaptive reuse projects, which will help reenergise our cities both locally and globally. I particularly love this recent quote from the CEO of Canadian Real Estate Company, Ivanhoe Cambridge. “The best building for the planet is the building that you don't build”. Thanks for tuning into this latest episode of Talking Property with CBRE. If you like the show and want to check out more, follow Talking Property on Spotify, Apple Podcasts, or your favourite podcast hosting platform. And if you have any questions about today's episode or suggestions for future podcasts, you can email us at [email protected]. Until next time.