Adelaide CBD experiences highest net absorption since 2014

Colliers International releases CBD Office H2 2017 research and forecast report

The Adelaide CBD office market recorded its highest net absorption figures since January 2014 in the second half of the 2016/17 financial year, according to Colliers International’s latest CBD Office research and forecast report.

Vacancy fell ever so slightly to 16.1 per cent, down from 16.2 per cent in January 2017, with net absorption in the six months to July at 4,624sqm, compared to the annual figure of 6,106sqm.

Colliers International’s director for Research, Kate Gray, said this small decline in vacancy could be partially attributed to the remainder of the recently refurbished 1 King William Street being added back into supply.

“Despite the prevailing high vacancy rate, there are few large contiguous spaces available, and secondary vacancy remains high at 17.8 per cent,” she said.

“As in other CBD office markets, we are witnessing a flight to quality, with prime-grade vacancy tightening to 13.8 per cent from 14.9 per cent in January 2017.”

The report indicates that Adelaide’s construction cycle has slowed, with no new office buildings due to complete this year or into 2018, and construction unlikely to commence on pipeline projects without significant pre-commitments.

“The Australian Government Attorney General’s Department is understood to have committed to approximately half of the Charter Hall development on Franklin Street, which is on track to be completed by October 2019, representing the only net new office space available for lease in the next two years,” Colliers International’s state chief executive for South Australia, James Young, said.

“Our discussions with major occupiers in the market point to demand for modern office space of the like that doesn’t exist at present, providing support for development in the future.”

Ms Gray said net face rental growth had stalled for premium- and A-grade office accommodation, pushing incentives slightly to an average of 37 per cent on prime-grade space.

“B-grade accommodation has seen a slight fall in net face rents, as well as an increase in incentives,” she said.

“This is likely to lead to increased refurbishment activity for B-grade and secondary assets, as landlords sharpen their focus on tenant retention.

“At this stage, it is unlikely that there will be any significant withdrawals of space for conversion to residential, and therefore secondary-grade vacancy is likely to remain high into the medium term.”

Despite the stagnant conditions, Mr Young said there were several reasons to be positive in the forecasts for demand for the Adelaide office market in the next 12 months.

“Growth in white-collar employment and therefore demand is likely to be driven by small to medium enterprises in the areas of education, healthcare and IT,” he said.

“There is also a higher level of larger lease expiry throughout the next two years so the number of leasing transactions are expected to improve in the next 12 months.

“The roll-out of the Ten Gigabit City project is likely to drive new demand into the Adelaide office market, as this project is a world-first and offers businesses a secure and fast business-to-business network.”

By comparison, a hold on supply coupled with consistently strong demand is pushing rental growth in the Sydney and Melbourne CBD office markets.

Population growth in New South Wales and Victoria is identified as a key catalyst in the market’s “perfect storm” conditions, with migration figures well above their 10-year averages in both states fuelling strong white collar job creation – but the report reveals that office supply will be constrained during this time of unprecedented demand.

Throughout 2016, 72,013 local and overseas migrants moved to New South Wales and 92,038 migrants moved to Victoria, which is 38 per cent and 45 per cent respectively above 10-year average migration levels in those states.

Colliers International’s national director of Research, Anneke Thompson, said office supply for the next 12 months was “even more ominous”.

“We’re forecasting the Sydney CBD office market to contract by 50,000sqm throughout the year to July 2018, and the Melbourne CBD to reduce by circa 5,000sqm, based on the supply that we know will enter the market and forecast withdrawals,” she said.

“This is at a time when Deloittes Access Economics expects an additional 5,600 office-based workers to require space in the Sydney CBD, and 6,121 workers in the Melbourne CBD.

“Based on a conservative estimate of 11sqm per office employee, this is about 60,000sqm of demand in Sydney and about 65,000sqm of demand in Melbourne. In a climate of reducing availability in stock, it’s only natural that face rental growth will increase.”

Colliers International Adelaide South Australia CBD Office RFR research forecast report King William Street leasing investment sales commercial property

The kitchen in Colliers International's new South Australia office at 121 King William Street, Adelaide.

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