A resurgent Office Middle Markets has seen a marked shift in office investment strategy, as purchasers increasingly look to reposition, repurpose or add value to secondary stock.

A total of 15 assets were exchanged nationally in the first quarter of 2024, totalling $719 million, according to the Colliers Office Middle Markets Report, an increase of 71 per cent over the same period of 2023. While investment-purpose transactions remain prevalent, purchasers are increasingly adopting diverse strategies to make the most of their

Notably, approximately 21 per cent of Office Middle Markets sales in 2023, between $10 million and $150 million, of existing office buildings were traded with repositioning/repurpose considerations or with vacant possession.

Of this cross section, residential development leads the way, accounting for 25 per cent, largely in the $10m to $50m price bracket. Approximately 13 per cent are planning a mixed-use development to better leverage the synergy of residential and retail demand, as well as flexible working space, and 6 per cent are looking to convert into a hotel. On top of this, 19 per cent are actively planning a repurposing project.

“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,” Managing Director, Investment Services Matthew Meynell said.

Similarly, the rapid emergence of ESG considerations and trends like ‘flight to quality’ and the new expectations of the office experience have prompted a large proportion to undergo an upcycling process. Approximately 25 per cent are likely to either upcycle or rebuild to provide improved amenities, flexible spaces of higher ESG ratings.

“Owners fully 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,” Ms Meynell said.

Based on 2023 transactions between $10 million and $150 million, a total area of 52,000sqm is likely to be withdrawn nationally for alternative uses, predominantly in metro and fringe markets. While transaction data suggests increased repositioning activity in the CBD markets, some existing property owners are also considering changing the property use. This could lead to further withdrawals from CBD markets in addition to the current repurposing.

Colliers Research shows that a total of 122,000sqm of permanent withdrawal nationallly is needed for CBD office markets to revert back to historical long-term vacancy averages, driven by secondary assets with high vacancy profiles to meet the balance between supply and demand.

“In the long run we expect the impact to not only be highly beneficial to the office sector, but also the CBD’s in which this occurs. There will be a healthier office market headlined by more Prime grade stock and it will create a more diversified CBD environment. Adding more residential, hotel and other accomodation 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,” Associate Director, Investment Services Catherine Scott said.

On top of this, owner-occupiers have seen a prominent increase in activity, accounting for 12 per cent of total transactions in 2023 compared to the historical average of 4 per cent.

Transactions predominantly fell below the $50 million mark and were concentrated in fringe and metro markets, allowing owner - occupiers to align with peer organisations or establish proximity to their customer and client bases.

“Many owner-occupier purchasers have articulated plans to refurbish their office spaces before occupancy, aiming to optimise space utilisation and enhance appeal to employees. This strategic approach reflects a broader acknowledgment of the role of workspace design and functionality in fostering employee satisfaction and encouraging a return to the office,” Ms Scott added.