Negative quarterly net absorption

• Quarterly net absorption was negative 351 sqm in Q4 2023, a significant decrease from the previous quarter which was the highest net absorption recorded since Q4 2008. Expansionary and centralisation activity by government services and banks supported demand, but this was counterbalanced by the consolidation activity of small tenants in secondary stock.
• Headline vacancy increased to 18.0% and the prime vacancy rate also increased after one quarterly decrease, back up to 18.6%. The high vacancy rate is still being impacted by the backfill space created by Adelaide’s largest ever supply wave; we recorded 101,300 sqm of completions over 2023 which was the largest annual figure since 1988.

One completion in the quarter

• One Festival Tower reached practical completion at Lot 602, King William Road in Q4 2023. The 40,000 sqm premium grade office tower is part of the broader Festival Plaza redevelopment by Walker Corporation. Flinders University, Deloitte, Mott MacDonald and Allianz pre-committed a total of 26,000 sqm to underpin the development.
• There is 37,200 sqm in the supply pipeline currently under construction, with the largest asset being a 21,000 sqm office tower development by Kyren Group at 42-56 Franklin Street. The 21-level office building has a retail component on the ground floor and is speculatively under construction.

Yield decompression cycle continues

• Average prime net face rents increased in Q4 2023 by 1.5% to AUD 467 per sqm per annum, and average prime incentives decreased marginally. This resulted in average prime net effective rents increasing by 2.1% to AUD 183 per sqm per annum.
• The yield decompression cycle that commenced mid-2022 continued in Q4 2023 with average prime midpoint yields softening by 25 basis points (bps) to 7.25% over the quarter. As a result, average prime midpoint yields have decompressed by 118 bps over the last 12 months.

Outlook: Occupier demand to stabilise in the short term

• Occupier demand is expected to be driven by opportunistic upgrading of office accommodation, coupled with ongoing centralisation activity over the short term. As a result, it is expected that vacancy will remain elevated over the medium term as supply-driven back-fill space gets re-absorbed incrementally.
• The yield decompression trend is projected to continue playing out over the first half of 2024 as buyers and vendors continue to go through a period of price discovery. As broader economic conditions stabilise (namely clarity around interest rates), investor confidence is expected to slowly return to the market.