With a record amount of new supply coming online within Adelaide’s office market, owners of older vacant stock need to commit to major reinvestment to compete for tenants.
This is one of the key conclusions within Knight Frank’s latest Adelaide CBD Office Market Report, which presents opportunities for landlords to add value as the investment market stabilises.
Given the amounts of new supply coming online, Knight Frank Partner, Valuation and Advisory Nick Bell says there’s a wake-up call for owners of older vacant stock: Either commit to major reinvestment to enhance the lower performing assets or risk having emptier offices.
Knight Frank data suggests capital is gravitating towards core-plus and value-add assets where the increased cost of capital can be offset with enhanced returns from active management initiatives – which often include building efficiency upgrades.
Refurbishments and incentives on the rise
Unsurprisingly, in light of these warnings, Adelaide CBD is witnessing a rise in refurbishments.
For example, 150 Grenfell Street is undertaking a full-scale reconstruction including a new facade and all new services, with a focual point being its environmental sustainability credentials.
It will offer over 9,300sqm of brand new space once complete in early 2024.
In an attempt to backfill vacancies, Bell expects to see a further uptick in incentives from low A-grade property.
Average incentives for prime and secondary space were up slightly in H1 from 31.2% to 31.8% and from 37.3% to 37.9% respectively.
Adelaide had been nation-leading in CBD office occupancy in 2023, with the last recorded occupancy data released by the PCA in March showing Adelaide up to 80% of pre-covid occupancy, signifying a positive outlook for the Adelaide leasing market and CBD building owners
Renewed optimism
According to Knight Frank’s research, the cash rate pauses and increasing demand for high-quality CBD space are breathing renewed optimism into the Adelaide CBD office market.
What this optimism presents, according to Knight Frank Partner, Research and Consulting Dr Tony McGough is opportunities for building owners looking to backfill vacancy to capitalise on ESG and ‘flight to quality’ trends to remain competitive and boost occupancy and rents.
Interestingly, Knight Frank data suggests the vacancy rate for prime assets positioned in Adelaide’s core precinct with strong environmental initiatives – a 5 Star NABERS energy rating or greater – is only 4.78%, compared to Adelaide’s overall vacancy rate of 16.8% for prime assets.
“Tenant demand, particularly for prime space, has been strong and rents have consequently risen,” said McGough.
“Adelaide had been nation-leading in CBD office occupancy in 2023, with the last recorded occupancy data released by the PCA in March showing Adelaide up to 80% of pre-covid occupancy, signifying a positive outlook for the Adelaide leasing market and CBD building owners.”
Prime stock in high demand
Due to supply additions of 87,016 square metres (an historic high) the vacancy rate rose slightly from 16.1% to 17% over the first half of 2023, even in the face of strong underlying tenant demand.
Underpinning a substantial demand disparity between the old and the new, vacancy rate of 10.3% for new generation prime CBD stock within the core precinct, compares with a 25.4 % vacancy rate for older prime core stock.
Rent on the rise
As of July 2023, the Adelaide CBD’s average gross effective rents for prime and secondary stock increased by 3.4% and 2.7% respectively year-on-year to $414/sqm and $276/sqm.
Knight Frank forecasts have prime effective rents increasing by another 3.7% over the next 24 months.
Sales and yields
In the six months to July 2023, total CBD asset sales over $10 million in value in Adelaide’s CBD office market totalled $217.6 million, down 40% on H1 2022, but 256% higher than the $61 million in H1 2021.
An additional $71.6 million has settled or is settling post-July 2023.
Meanwhile, Adelaide CBD prime yields have softened 97 basis points from 5.84% to 6.81% over H1 this year, with the yield spread to Sydney widening 63 basis points to a current differential of 165 basis points.
