Vacancy remains steady as Adelaide business lease more office space

Vacancy expected to spike late in 2015 before falling next year: Colliers International

Adelaide businesses have leased more space in the first half of the year than the same period in 2014 as the city’s office vacancy rate remains steady.

According to the latest Property Council of Australia Office Market Report, Adelaide’s CBD office vacancy at July 2015 was 13.5%.

Nick Shinnick, Colliers International National Director of Office Leasing based in Adelaide, said the result was expected, and the city’s vacancy rate was predicted to increase to a forecast high of 14.8% by the end of the year.

“From this point it is expected that vacancy will to start to fall as any improvements in demand will impact positively on the vacancy rate,” Mr Shinnick said. “There are several factors which have driven vacancy to these high levels.

“Supply has increased by just under 150,000sqm since the beginning of 2012 and, although much of this space was pre-committed, growth in while collar employment was not high enough to take up the back fill space left from vacating tenants.

“There are still some properties which were vacated early in this construction cycle which still remain vacant. Adelaide also has the highest percentage of C and D grade space compared to other capital CBD office markets, which shows much higher vacancy than prime grade space.

“Most other office markets see this stock removed and either converted to another use or demolished and new office/residential developments built. In Adelaide, there are still a significant number of vacant development sites and these sites are more likely to be developed in preference to converting an existing building. All of these issues combined have resulted in the current high vacancy rate."

Colliers International research found net absorption in the Adelaide market also remained below the long term average, with 4,443sqm of space absorbed over the last six months.

“Several large occupiers who have signed new leases are either downsizing or have a similar space requirement to that which they are currently occupying,” Mr Shinnick said. “Most of these tenants are looking for more efficient use of the workspaces they occupy, with many opting for more open plan and paperless offices."

New supply to the Adelaide office market is forecast to slow, with 50 Flinders Street due to complete in the second half of the year. The completion of this project will see a further 21,183sqm added to the Adelaide office market. This building will be 80% occupied by People’s Choice Credit Union and Santos on completion.

“It is likely that vacancy will increase further this year and then start to fall from the beginning of 2016,” Mr Shinnick said. “Vacancy is expected to remain at elevated levels in the medium term with current forecasts showing vacancy above 10 per cent until the end of 2018, although Prime grade vacancy is expected to fall far faster than secondary grade vacancy."

However, according to Colliers International’s latest Office Demand Index, Adelaide businesses have leased 70% more space in the first half of this year compared to the same period last year – 19,035sqm compared to 11,230sqm.

Mr Shinnick said the time between a tenant coming to the market and completing a transacation was lengthening.

“We believe it is a combination of factors – there are more options to look at and tenants are being more considered with their choices,” he said. “What we are seeing is a spectrum of enquiry with all industry categories being active.

“The majority are looking to consolidate into a single location and are looking to properties that support higher density layouts. This enables tenants to reduce their per sqm footprint and hence rental outlay, with improvements in technology and remote working supporting this.

“With the reduction in white collar employment, we are seeing some of the best fitted out opportunites in the market for some time and in some instances the space has barely been used, if at all.

“This presents a great cost saving for tenants who can be flexible and utilise the previous occupiers’ layout. Saying that, however, many business prefer to tailor a fit out to suit their business to gain maximum operational benefit from a relocation.

“We expect activity to be on the increase in the second half of 2015, with many of those tenants enquiring in the first half of the year concluding their decision-making in the second half. We expect extremely limited new supply to the market, which will provide property owners the confidence to spend and upgrade existing stock for the betterment of occupiers.”

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