Adelaide office market- stuck in the 1980’s?

March 13, 2013 / By

In 2011, the Oscar-winning producer of ‘The King’s Speech’ filmed scenes for a movie set in 1980’s Perth, in Adelaide, because Perth had “too many sky-scrapers and looked too modern”. Conversely, Adelaide “remained mostly unchanged since the 1980’s”. This is reinforced by the fact that over 75% of stock in the Adelaide CBD was built over 20 years ago. In addition to the age of stock, Adelaide has the lowest proportion of prime grade stock of all monitored capital city markets in Australia (Figure 1). Just 32% of Adelaide stock is classed as prime, compared to the national average of 51%. At the other end of the scale, Canberra has the highest proportion of prime grade stock, which was due to a boost in government led pre-commitments for new buildings over the past 10 years.

The ‘Flight to Quality’ trend has been reported widely over the last three years, as tenant preference in office space has led to a shift in occupancy from secondary stock to prime. The ongoing demand for quality stock has led to a structural undersupply of prime space. Consequently, vacancy has remained relatively stable for prime grade stock (5.9%), whereas secondary vacancy has crept upwards, reaching 14.0% at the end of 2012. This is the largest gap between prime and secondary vacancy in the Adelaide market in over 10 years, and is much higher than the national average of the difference between the two grades for the past 10 years (2.25%).

Not only is vacancy significantly lower in prime office space, the potential for higher rental returns is also clear. Currently, gross effective rents are AUD$369 per sqm p.a. for prime office space and AUD$260 per sqm p.a. in secondary buildings, based on a hypothetical 10-year leasing deal.

The age profile and quality of the Adelaide office stock has led to a disconnect between tenant preferences and the majority of secondary stock. Properties with good functioning floor plates, ability to adapt to the latest technology, and sustainability credentials have featured highly on tenants’ wish-lists. Other features, including a high amount of natural light and a modern design and feel also set prime stock aside from the older secondary stock in the Adelaide market.

A factor which may set Adelaide apart from the other capital cities is that a high proportion of office stock is held by local private owners, who are passive in their investment strategy. Perhaps the high vacancy levels over a prolonged period or a significant gap between rents achieved in a particular property and new space entering the market, may be the impetus for development activity in the future.

The current dynamics at play within the Adelaide office market present an opportunity for owners of secondary stock to reposition their property and take advantage of continued levels of tenant demand and higher rental returns.

Figure 1: CBD Office Markets Proportion of Prime Grade Stock

Source: Jones Lang LaSalle Research

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