Sydney’s property market – particularly the inner-city – is hot.

There’s no denying it. As a result, commercial withdrawals for residential conversion – industry speak for when offices, warehouses and retail spaces are bought up by developers for housing – is in full swing. Some decry the loss of local business, but there’s more to the story than that.

Here are some observations about what’s really happening in the inner-east commercial market, and why the transformation of commercial properties into residential can be such a great thing for communities.

1. People want to live here, and why wouldn’t they?

Developers and investors don’t just buy up commercial stock for the sake of it. The judge demand, and act accordingly. Sydney’s inner-east is incredibly popular with buyers and tenants alike, for many reasons. It has great transport connections to the city and other employment hubs, beautiful architecture and streetscapes, easy access to the harbour front and its incredible views, and amazing recreational spaces.

This has put pressure on prices and rents and means there’s little available stock on the market. This demand means that developers will turn to available commercial assets to inject new stock into the market and give the buyers what they want.

2. Some businesses have had their day

As legislation changes and technology pushes some commercial businesses out of the inner city, some businesses inevitably fade from view. For instance, in Potts Point, the rise of Airbnb and the change to lockout laws mean budget accommodation and nightclubs are finding it increasingly hard to maintain relevance and are increasingly making way for residential development.

But it’s important to note that with new residential development often comes the chance for new businesses to flourish.

Omnia, a 19-storey mixed-use development slated for 111 Darlinghurst Road in Potts Point, is a prime example of this, replacing the old Crest Hotel.

The development will include 135 apartments, and two levels of retail. The construction of developments like this is a crucial component of Potts Point’s evolution and fosters a more inclusive community atmosphere.

As this change accelerates in coming years, expect to see more accommodation like backpackers converted into residential accommodation, although there will likely be a few high-end boutique hotels constructed as well.

3. Many commercial buildings have been neglected

It’s not just hotels and backpackers that are involved in the inner-east’s residential revolution, but the many legacy industrial buildings too – harking back to the day when manufacturing and light industry were commonplace in the area.

Many of these assets that developers turn to have been held for decades by investors who have seen the writing on the wall and are biding their time as they wait for residential demand to appear – a move that’s commonly referred to as land banking.

During this time, many will have been hesitant to invest in upgrading these commercial assets, as there’s little point when it will be converted to housing stock anyway, and many of them have been underutilised as a result.

This often creates the appearance of neglect and leads to these areas having a huge discrepancy between the gentrified section of a suburb and the remnant industrial sites.

Urban renewal, in this case, brought about by residential conversion, helps change this while retaining the historic elements of these imposing buildings.

The Riley development, in which a former warehouse has been transformed into four terrace houses on Riley Street in Darlinghurst, is a great example of this renewal concept in action – restoring an industrial building to its former glory and transforming the street’s dynamic.

4. Some properties were never intended to be commercial

It’s important to remember that not all of the assets being bought up were intended to be commercial properties, and not all of the buyers are developers. Many shops and dining establishments in and around Potts Point were originally built as houses, and have great appeal to high net worth buyers now that living in the suburb is back in vogue.

Take the conversion of 29 Challis Avenue, Potts Point as an example of the success of such a strategy. A commercial building when we sold it in 2014 for $5.25 million, the four-bedroom, five- bathroom property was restored back to its residential glory and we sold it again in 2016 for $13 million – setting a record price for an Australian terrace house.

Those who love Sydney’s inner east, like me, will be watching this space with interest to see where the next few years take us.

Article by Jason Boon

In a real estate market that is the focus of Australian, and indeed worldwide attention, Jason Boon's results in the Sydney scene make him a highly significant figure within the industry. A long-term specialist in the Potts Point and inner eastern suburbs area, he is uniquely placed to leverage his skills and local knowledge as the area undergoes significant change and diversification. Jason ha…