Office Market Overview

The Adelaide CBD is experiencing its largest construction cycle of the last 15 years. In 2006, 31,000m2 of new office space entered the market, while in 2007-08, a further 90,000m2 of space is due to complete.

Most prominent among these projects are City Central Tower One on Waymouth Street, 151 Pirie Street and Flinders Link. Further projects are committed, most notably SA Water’s new headquarters in Victoria Square.

As with most spikes in supply, there has been a domino effect with developers and land owners reconsidering options for their landholdings. This may well lead to a continuation of the supply cycle beyond 2008, placing greater pressure on vacancies.

Project Name	Address	Grade	Comp Year	NLA(m2)
Advertiser Building	31 - 45 Waymouth Street	A	2005	12500
Commonwealth Law Courts	1 Angas Street	A	2005	6200
Flinders Court	153 Flinders Street	A/B	2005	4280
City Central Tower 1	17-29 Waymouth Street	P	2006	31329
Flinders Link - IAG	76 Flinders Street	A	2006	12000
KPMG Building	151 Pirie Street	A	2006	11547
ACCU	52 - 60 Light Square	A	2006	7200
Opalfield House	29 King William Street	B	2007	1740
	12- 18 Gilles Street	B	2006	1470
Flinders Link - Santos	60 Flinders Street	A	2006	15500
Channel 10	78 Hutt Street	B	2007	1800
Former RBA Building	182 Victoria Square	A	2007/08	6600
	125 - 130 West Terrace	B	2007/08	2118
RAA Site	131 - 139 Grenfell Street	A/B	2008	4391
City Central Tower 2	121 - 129 King William Street	A	2008	12378
	321 South Terrace	B	2008	2370
SA Water Building	250 Victoria Square	P	2008	22400
	379 King WIlliam Street	B	2008	2235
Former Repco Site	372 - 400 King William Street	A	2008/09	21000
City Central Tower 3	Franklin/Bentham Street	P	2009/10	16500
	42 - 56 Franklin Street	A	2009/10	16000
	73 - 79 Pirie Street	A	2009/10	35350

Table 1: Source: Jones Lang LaSalle

Net Lettable Area (NLA) refers to floor area for office use

  

Demand and vacancy  

Overall, demand for office space has continued to grow, with net absorption in June 2006 amounting to 25,000m2. Major corporations have been particularly active in committing to new developments or upgrading to higher quality existing space.

Demand for better quality space has become the impetus for the development of the new prime office supply. Over 60% of total space under construction is pre-committed with tenants vacating existing prime (premium and A grade) and secondary (B,C and D grade) space.

Virtually all of the pre-commitments are from existing CBD tenants.

With a sizable amount of prime space due to enter the market, building owners should consider strategies to keep their buildings competitive.

The state government has been active in driving the increased interest in energy efficient workplaces, having pre committed to City Central Tower One and targeting other buildings that can show improved energy efficiency. This is despite the considerable premium attached to such space.

The vacancy rate across the CBD in December 2006 was 7.3%. The prime grade vacancy rate was 4.4% while secondary grade buildings were 8.5%.

Recent pre commitments to quality accommodation and the disparity in prime and secondary grade vacancy reflect the overall flight to quality that has continued in the Adelaide market. This will place pressure on lower grade accommodation over the next two to three years with vacancy rates rising in consequence.

In particular, it is the C and D grade buildings that are struggling to maintain relevance, with vacancy levels in these building grades at 9.7% and 13.8% respectively.

Rents

Recent demand for good quality space has been reflected in strong growth in prime gross effective rents during the past 12 months of 13.5% to now average $256 per square metre. Secondary gross effective rents have seen modest growth in the past 12 months to now average $143 per square metre.

Incentives on a 10 year market lease were stable at between 15-20% for prime grade stock, but were significantly less for renewals or shorter lease terms (10-15%).

Increased supply over the next two years may place upward pressure on incentives. Secondary stock incentives on a new 10 year lease are running between 25-30%.