Adelaide CBD Office Market
Adelaide CBD records third strongest net absorption of the CBD office markets in Australia
Net Absorption, Vacancy and Supply
According to the Property Council of Australia Office Market Report, Adelaide recorded the third strongest net absorption (19,811 square metres) out of all monitored CBD office markets over the 12 months to July 2018, including 10,115 square metres over the first half of 2018. Net absorption was strongest for B- grade buildings over the first half of 2018.
The headline vacancy rate for the Adelaide CBD remains elevated but recorded a further fall, declining by 0.7 percentage points from 15.4% in January 2018 to 14.7% in July 2018. Steady stock levels combined with above long-term average positive net absorption, placed continued downward pressure on vacancy over the six-month period. Vacancy rates for prime-grade stock over the 12 months to July 2018 increased from 13.8% to 14.0%, whilst vacancy rates for secondary stock decreased from 17.8% to 15.1% over the same period.
Adelaide is at the bottom of the supply cycle, with the next stage of growth anticipated to begin in the second half of 2019 with the completion of Charter Hall’s GPO Tower (24,500 square metres). The building is over 90% pre-committed to by the Attorney Generals Department and BHP.
Leasing Market Strengthens
The majority of tenant enquiry is coming from tenants requiring circa-500 square metres. Whilst a number of businesses are moving into the expansion phase, increased work space efficiency has, and is continuing to result in a healthy portion of renewals signing on for a reduced amount of space.
Whilst leasing demand has strengthened, there continues to be a state of oversupply in the market. As a result, there are still likely to be many opportunities for small- to medium-sized tenants entering the leasing market as well as for existing tenants whose leases are close to expiry. This has resulted in face rents remaining stable over the 12 months to June 2018.
According to m3property Research, net face rents as at June 2018 ranged from $370 to $435 per square metre for prime assets and $230 to $355 per square metre for secondary stock.
Incentives remain at elevated levels, with owners largely trying to maintain face rental levels in negotiations. Incentives for prime and secondary grade stock currently range from 30% to 40% and 25% to 40% respectively.
Foreign Investors Increase Presence
Strong investment demand and high sale volumes continued over the 12 months to June 2018, with
circa-$587 million worth of major transactions occurring, up from circa-$501 million over the previous period, and well above long-term averages.
Foreign investors have accounted for the majority of sales (in terms of value) by purchaser type. Purchases by unlisted funds have also accounted for a healthy portion of transactions over the period.
The largest sale of 2018 to date has been ANZ House (11 Waymouth Street) for $202.5 million (acquired by Mapletree Logistics from Dexus Office Partnership).
The third and final cut to fully abolish stamp duty on commercial property transactions was effective from
1 July 2018. This is expected to further strengthen interest from interstate and foreign investors, developers, and syndicates etcetera who have traditionally looked elsewhere for opportunities.
Greater Returns on Offer
There continues to be a significant yield spread between Adelaide’s office market yields and other eastern seaboard yields, making the greater returns on investment more attractive.
Market yields as at June 2018 ranged between 6.00% and 7.00% for prime stock and 7.50% and 9.00% for secondary assets.
The Outlook is Positive
- According to m3property Research, vacancy is forecast to decline over the next year and remain relatively unchanged over the financial year ending 2020 due to tenant moves into GPO Tower in late 2019 and the subsequent influx of backfill space. Vacancy is then expected to continue its downward trend thereafter, albeit at a steady pace.
- A total of 31,100 square metres of new supply is expected to be completed between now and the end of 2019. Beyond this, major developments are unlikely to go ahead unless significant pre-commitment is achieved.
- We expect net face rents to increase at circa-CPI over the forecast period and for incentives to start to peel back in the second half of 2019.
- Yields are forecast to have reached the bottom of the current cycle and are expected to remain unchanged over at least the next 12 to 24 months.