Blog - TGC News
NEW TREND: RETAIL-TO-OFFICE CONVERSIONS
We’re all too familiar with landlords transforming commercial office space into residential to help meet the demand for contemporary living space in the CBD and to attract higher returns.
But there’s a new trend emerging.
Recently, we have seen a few conversions from retail to office space in the Sydney market. And we expect more over the coming few years. Here are three major factors shaping this new movement:
1. Bridging the gap
Traditionally, retail spaces have been more expensive per square metre (/sqm) than commercial because they enjoy greater connectivity, visibility, foot traffic and access.
Commercial office rents are, however, catching up with retail. In fact, over the past few years, office rents have increased from circa $450/sqm to up to $750/sqm on the city fringe and from $600 to circa $900 in the CBD (B-grade stock).
We’ve even seen some landlords drop their rents to help attract commercial tenants such as tax advisors, architects, accountants and creative agencies, who want the brand exposure a retail shopfront offers, without the price tag.
2. Less complication
Leasing to commercial tenants is far less onerous and complicated than retail tenancies.
This is because, unlike retail leases, which are governed by The Retail Leases Act 1994, commercial leases have no overarching piece of legislation that dictates what can and cannot be included.
Here are some significant differences to consider:
Unlike a retail lease, commercial leases are allowed to have the following:
- A ratchet clause – an article which prohibits the rent from decreasing as a result of a rent review
- An escalation clause – a provision that increases the base rent each year over the lease term.
When it comes to retail leases, lessors and agents are obliged to provide specific information to tenants.
For instance, a landlord is required to present all disclosure documents – including information about future disturbances that might interfere with the tenant’s operations – at least seven (7) days before entering into a lease with a tenant. Failure to do so may give a tenant the right to terminate the leasing agreement.
This differs from a commercial lease, which is binding from day one.
The Retail Leases Act includes provisions that outline how fit-out costs can be negotiated between the lessor and lessee. So, retail tenants often receive much higher landlord contributions in the set-up phase than commercial tenants.
Inadequate fit outs
There are some small tenancies within residential projects that are technically zoned for retail use. However, in many cases, they are not adequately serviced with grease trap, mechanical exhaust risers, rubbish rooms and power supplies to be genuinely useful retail spaces.
3. Less risk
Given the high cost of setup for retail tenants, commercial users may be less risk. Retail is currently experiencing a relatively high failure rate due to lower consumer confidence, rising household debt, compressed wages, and competition from international and online players. Unlike commercial tenants, many retailers are also no longer willing to commit to long-term leases.
17 Randle Street, Surry Hills
One example of such a transition is the upper ground floor of 17 Randle Street in Surry Hills, leased by TGC Sales and Leasing Agent, Eric Lundberg.
This space was formerly an eatery but was renovated into a stylish office space with high ceilings, timber floors and great light. Leased out at $675/sqm per annum in December 2016, it is performing well with far less intensive management than retail use.
212-218 Cumberland Street, The Rocks
Another recent example is the ground floor at 212-218 Cumberland Street, The Rocks, leased by TGC Sales and Leasing Agent, Hamish Mackay.
Traditionally used as retail, this suite was recently leased to Siren Design Group, a team of creative interior designers.
The large, sunlit space has a high degree of integrity and has retained much of its original features including brick and stone elevations, steel framed windows and timber joinery.
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Where a retail tenancy is less than A-grade and can be set up as a suitable office space, attracting a high-quality commercial user can be an excellent option.