Adelaide CBD Office Market - 2020 and Beyond

October, 2020

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Summary

There is approximately 92,386sqm of new supply forecast to be added to the Adelaide CBD over 2020-2023 with circa 53,300sqm pre-committed. New supply is forecast to result in 39,086sqm of backfill space becoming available within the CBD.

Whilst restrictions in South Australia (SA) have eased, tenant demand continues to be impacted negatively by the uncertainty driven by the COVID-19 health and economic crisis, which continues to unfold.

Vacancy is expected to rise in the short term, however, the Adelaide CBD office market is potentially more insulated to sharp economic downturns than the eastern states due to the relatively low number of large corporate occupiers.

Authors

Zoe Haskett

Research Manager

View Profile > SA
Simon Hickin

Director

View Profile > SA

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New Developments Under Construction

  • COVID-19 presents potential challenges to the supply pipeline due to the delay of building materials from international suppliers and reduced number of workers on-site as per social distancing restrictions and future potential positive COVID-19 cases.
  • There are currently two developments under construction and one nearing completion. Kyren’s speculative development at 108 Wakefield Street is expected to complete in November this year, with no known pre-commitments at the time of this report. Commercial and General’s Australian Bragg Centre for Proton Therapy (SAHMRI 2) development is underway, with the Department of Health and Wellbeing (DHW) pre-committing to five levels, including four levels of office. The total office component of this development is still undecided, with the development’s usage heavily focused on research and ‘next generation’ cancer treatment. For the purpose of this analysis, we have reported the office component of the development to be fully committed.
  • Tender submissions for Cbus’s development at the former Planet Night Club (83 Pirie Street) closed in mid-August, with construction likely to commence towards the end of the year. The development has secured a pre-commitment of circa 58% (17,500sqm) by the Department of Transport and Infrastructure (DIT), formerly the Department of Planning, Transport and Infrastructure (DPTI).
  • Two further developments (Lang Walker’s Festival Plaza office tower and Charter Hall’s Southern Cross development, both 40,000sqm) in the pipeline are competing for the same tenant requirement for the Commonwealth Department of Human Services of approximately 29,000sqm. It is likely however that only one of these developments will proceed and complete prior to the end of 2023. Our analysis, therefore, assumes only one 40,000sqm development will proceed and that it will be circa 73% (29,000sqm) pre-committed.
  • Looking at the developments currently under construction, together with 83 Pirie Street and one of the 40,000sqm developments, it is forecast that we will see approximately 92,386sqm of office space added within the next three years. Taking into consideration the above assumptions, approximately 58% is pre-committed, leaving 39,086sqm available for lease.
  • There are a number of additional developments in the pipeline, however, they’re unlikely to proceed to construction in the absence of a substantial level of pre-commitment.

Obtaining pre-commitments from non-government tenants has become more difficult due to economic uncertainty and delaying of tenant decisions due to COVID-19. Weakening demand is forecast to result in a short-term oversupply of office space and rising vacancy by the years’ end.

  • Approximately 39,086sqm of new vacant space available over the next three years.
  • When considering the amount of new space added and pre-committed by year, there will only be 15,586sqm of vacant new space available until 2023, when 23,500sqm of vacant new space will become available.

COVID-19 to weaken tenant demand over the next 12- 18 months

Backfill Space Availability

  • Total space currently occupied by tenants who have pre-committed to new developments under construction or to be completed over the next three years is approximately 55,680sqm.
  • In addition, the South Australian Fire and Emergency Services Commission (SAFECOM) has pre-committed to the second stage of the Worldpark development outside of the CBD, which will potentially create a further circa 2,820sqm.
  • At this stage, none of the backfill space is planned to be withdrawn for refurbishment, leaving the full amount available for lease.
  • The total vacant space available for occupation over the next three years is approximately 97,586sqm including new and backfill space. Only 18,406sqm is expected to be available over 2020 to 2022, with most of this space becoming available in 2023 (79,180sqm).
  • One of the largest areas available for lease within a single building will be the whole of 77 Grenfell Street at 15,888sqm available across 18 floors. Another large portion of backfill space becoming available will be 10,561sqm of non-continuous space in Allianz House at 55 Currie Street currently occupied by DHS.

Leasing Requirements

Current leasing requirements where tenants are considering the Adelaide CBD as a potential or likely location, totals circa 41,510sqm (exc DHS).

  • For the purpose of this analysis, we have not included the DHS requirement (29,000sqm) but have added it to the level of pre-commitment for new developments.
  • According to the lease requirements listed on Property Daily, of the tenants considering a CBD location, there were more listings for spaces under 500sqm compared to any other space range.
  • The number of active leasing requirements for space required under 500sqm contributed to approximately 33% of the total number of enquiries, whilst the number of requirements for areas between 3,001 to 10,000sqm was only 6%.
  • The total area by tenant enquiry for spaces under 500sqm was only 3,811sqm whilst the total area by enquiry for spaces between 3,001 to 10,000sqm was nearly double.
  • Even though the demand for spaces under 500sqm contributed to the highest proportion of listings, they only make up 9.18% of the total area required. This is a smaller proportion of total area when compared to all other space ranges.
  • Current tenants with active leasing requirements in the Adelaide CBD total approximately 41,510sqm.
  • We expect requirements for space less than 3,000sqm to be most impacted with many decisions on hold for SME’s over the next 12-18 months. There is an increased probability for tenants within this size range to exercise options in existing premises with some likely to reduce space where possible.

Leasing Requirements By Industry Category

  • There were a total of 36 active enquiries listed on Property Daily during 2019 and YTD 2020. The Legal (19%) and Government (17%) sectors make up the greatest proportion of total enquiries.
  • In terms of the total area required by industry category Government with 30% (12,410sqm) and Legal with 24% (9,923sqm) makes up the highest proportion of total leasing requirements in Adelaide CBD.

SA has been more resilient than the national average in most sectors that have witnessed job losses as a percentage of total jobs

Impact of Job Losses

  • To show the real impact on industries of the COVID-19 crisis (without making changes to their labour force survey) the ABS in conjunction with the ATO’s single touch payroll system introduced new surveys, providing estimates for the total change in the number of jobs and how that has evolved since Australia registered 100 confirmed cases of COVID-19 on 14th March 2020.
  • The majority of SA employment sectors continue to witness declines in employee jobs over the week ending 5 September 2020 compared to the 14th of March 2020, however, the losses are improving. Of note, for the employment sectors that have witnessed job losses in SA, the percentage change for most sectors are less pronounced than the national average.
  • The sector to witness the largest decline in job losses over the period was in the Accommodation and Food Services sector at -15.5%, whilst interestingly, the sector that has seen the largest improvement over the period has been Education and Training at 5.1% growth. Whilst this sector had certainly been impacted during the initial period due to the uncertainty surrounding border restrictions, the sector has now been bolstered by reduced fees for selected short courses, people that were originally going on GAP year deciding to instead enrol and displaced workers deciding to use this as an opportunity to upskill or retrain.
  • m3property have analysed the total number of jobs in Adelaide CBD as per the ‘employment by industry’ data via economy.id provided by the National Institute of Economic and Industry Research (NIEIR).
  • We have thereafter applied job loss estimates as a percentage by industry category for SA to calculate the number of potential job losses in the Adelaide CBD.
  • The sectors to witness declines over the period and which are also users of office space was in the Rental, Hiring and Real Estate Services, Administration and Support Services, Professional, Scientific and Technical Services and Information Media and Telecommunications. These estimated job losses were positively offset by job creations in sectors which are users of office space in the Financial and Insurance Services, Education and Training and Public Administration and Safety (albeit noting the latter two sectors are also users of non-office space).

Adelaide CBD vacancy is forecast to peak by the end of 2020 with a second peak expected again in late 2023.

Adelaide CBD Vacancy Forecast Scenarios

  • Given the uncertain economic conditions as a result of COVID–19, m3property have carried out a scenario analysis of the impact of net absorption adjustments on the Adelaide CBD office vacancy rate. We have developed three vacancy forecast scenarios for the market by considering potential variations in tenant demand and potential backfill space availability.
  • Base Case – is based on the current economic outlook, including the white-collar employment forecasts and current leasing market conditions. m3property is forecasting vacancy to peak at 16.2% by December 2020 and reaches a second peak of 16.6% in 2023.
  • Scenario 1 – based on the long term average net absorption being reached over 2020-2022. Under this scenario, the vacancy rate could rise to a peak of 14.8% by December 2020 and reach a second peak of 14.9% in 2023.
  • Scenario 2 – based on the previous historical downturn net absorption averages (early 90’s recession, Tech wreak and GFC). Under this scenario, the vacancy would rise and hover around 16.0% till 2022, before reaching a peak of 18.9% in 2023.

Conclusions

Whilst the most likely path for vacancy over the next three years is around the base case forecast, there is scope for the rate to range down to “scenario one” or up to “scenario two”.

If demand quickly resumes and confidence returns to the economy and the Adelaide office market (According to the Property Council of Australia – SA, circa 61% of office workers had returned to the CBD), we would be likely to see forecast vacancy move towards “scenario one”.

However, if the economic recession results in a financial crisis or a second wave of the COVID-19 virus forces further restrictions, the outlook is likely to head up towards “scenario two”.