Office vacancy to tighten as Adelaide CBD construction pauses

Local property pundits expect office vacancy to tighten by the end of 2016 in the Adelaide CBD as construction activity pauses for the near term and net absorption increases.

According to Colliers International’s latest report, Prices soar as offshore investment dominates: Is Australia becoming too expensive?, the completion of 50 Flinders Street in Q3 2015 marks the end of a limited construction cycle.

The last five years has seen 200,000sqm of supply additions to the Adelaide market with circa 220,000sqm of space added in the five years prior.

James Young, Colliers International National Director of Office Leasing, said although there had been an increase in vacancy in the Adelaide CBD over the last six months, much of this was due to new supply being added to the market by way of refurbished stock re-entering the market and new buildings.

“The good news is that the Adelaide market is nearing the end of the supply cycle, so any improvements in demand are likely to see vacancy tighten by the end of 2016,” Mr Young said. “The current forecasts suggest modest growth in white collar employment for 2016 with bigger gains expected during 2017. Much of this growth is expected to come from small to medium businesses, education and health sectors."

Kate Gray, Colliers International Associate Director of Research, said the significant boost in supply over the last five years had not seen a corresponding lift in demand.

“Average six month net absorption over the last five years was just under 8,400sqm,” Ms Gray said. “The preceding five years however saw average six month net absorption of over 18,000sqm. There are several reasons for the differences in demand with a combination of lower than average white collar employment growth and the movement of many of the larger businesses to activity-based work models.

“This has meant less space is required, further dampening the demand and growth in office space. The combination of high supply and lower than average demand has contributed in an increasing vacancy rate in the Adelaide CBD market."

Ms Gray said the Adelaide CBD office market consistently had a higher level of secondary grade stock when compared to other capital cities, which also contributed to its higher vacancy rate.

“In Adelaide, the combination of C and D grade stock (secondary stock) accounts for 31.9% of total stock,” she said. “Compare this to Sydney (15.1%), Melbourne (15.2%), Brisbane (13%) and Perth (2.7%). This is important to note as in most CBD office markets secondary grade stock has a much higher vacancy rate."

Over the last five years, just under 149,000sqm of space was withdrawn from the Adelaide market, with just over 100,000sqm of this space being secondary grade.

“Most other CBD markets have seen secondary space withdrawn and either redeveloped to a new commercial building or, increasingly in the cases of Sydney and Melbourne, a conversion of use to residential through either the refurbishment of the current building or demolition to make way for new high rise residential towers.

“Melbourne, Sydney and Brisbane all have significant pipelines of new supply of residential apartments. At this stage this trend of converting commercial to residential or hotel use by withdrawing commercial stock is not particularly evident in the Adelaide market."

Ms Gray said the Adelaide residential apartment market was seeing a significant boom in construction. There were currently circa 1,700 apartments under construction in the Adelaide CBD, with most projects due to complete in 2016 or 2017.

“The state government has been able to stimulate this demand through a combination of changes to planning and the stamp duty exemptions for off the plan purchasers,” she said. “The reason there is limited impact on the withdrawal of older commercial stock is because the Adelaide CD still has a significant supply of development ready sites within the CBD that do not require multi storey demolition.

“Through tracking development site sales, there is also still a significant pipeline of development-ready sites which are more cost effective to develop than some of the older grade office stock.

“Unless some of the lower grade building are excluded from the stock list when vacancy is calculated, Adelaide is likely to continue have a structurally higher vacancy rate than other capital cities.”

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