Knight Frank has released its Adelaide CBD Office Market – April 2024 report. The research found demand for office space in Adelaide’s CBD has remained upbeat, spurring significant rental growth.
Amidst rising capital costs, which have cooled the investment market's fervour, occupier demand for office space in Adelaide’s CBD has remained upbeat, spurring significant rental growth, according to the latest research from Knight Frank.
Knight Frank’s Adelaide CBD Office Market – April 2024 report found there was rental growth of 3.4% for prime gross effective rents and 3.27% for secondary gross effective rents in Adelaide’s office market in H2 2023.
This was despite vacancy rates rising from 17% to 19.3%, predominantly due to an influx of new supply, which totalled 87,016sq m over 2023, making it one of the strongest supply years on record.
Knight Frank Partner, Research and Consulting, Dr Tony McGough said the noticeable increase in gross rental rates over H2 2023 was projected to continue into 2024.
“Effective rental growth has continued its upward trend in the Adelaide CBD office market despite rising incentives for the majority of building grades,” he said.
“Adelaide’s CBD office market continues to outperform other capital cities in terms of rental growth, mainly due to a strong occupancy recovery post COVID-19 and a lower cost base than the other states.
“New buildings have also recorded higher rates, setting new benchmark rents for Adelaide and pushing up overall rental growth.
“We expect continued growth, with an average annual increase of 4.5% in prime gross effective rents up to 2026.”
However Dr McGough added that as a result of the significant new supply additions and refurbished stock in 2023 and moving into 2024, tenants have a variety of options, creating a competitive environment and many opportunities for occupiers to relocate to newer, high-quality spaces fuelled by the strong development pipeline.
“As such, it is likely incentives for older and low A-Grade property will rise as building owners seek to fill vacancies,” he said.
“This trend is already evident, with average prime incentives rising from 31.8% to 34.1% in H2 2023, even while secondary incentives declined from 37.9% to 37.5%.”
The Knight Frank research found flight to quality remained a compelling factor in tenant movements in Adelaide’s CBD office market.
This is evidenced by new generation office space - completed since 2006 - continuing to attract the most significant occupier interest, overshadowing the more challenging leasing conditions for secondary and older assets.
“The spread between prime and secondary stock is wider than it has ever been,” said Dr McGough.
“Older generation prime stock recorded vacancy of 32.2% in H2 2023, while new generation stock
vacancy landed at 9.3% over the period.
“Without capital investment, refurbishments and quality upgrades, this gap is likely to continue to widen.”
The research found net absorption remained positive in Adelaide over H2 2023, but only just – at +673sq m. A continued resilient showing by prime demand (+3,945sqm) was virtually cancelled out by the fall in secondary absorption.
The Knight Frank research found new supply additions were expected to moderate over the next few years, with 65,063sq m to come online by the end of 2025, significantly lower than the 2023 additions of 87,016sq m, which was one of the strongest supply years on record.
This was expected to fall to 21,000sq m in 2026, with only 12,000sq m presently in the pipeline for 2027.
Investment market expected to pick up after limited transaction activity in H2 2023
Knight Frank’s Adelaide CBD Office Market – April 2024 found transaction volumes Adelaide’s CBD office market fell in the second half of 2023, with just one sale above $10 million, being 99 Frome Street at $13 million.
Knight Frank Director Institutional Sales SA Max Frohlich said despite only one sale in H2 2023, the occupier market remained upbeat with confidence being boosted by rising rental rates and tenant demand for high quality space, as well as investment activity elsewhere in the city
“Despite the lack of CBD activity, there were two significant metropolitan sales during H2 2023, and several sales in due diligence or under contract that provide better context to capital market movements,” he said.
“These transactions include a settled sale at 620 Mersey Road in Osborne for $46 million, at a 6.46% core market yield and Lockheed Martin’s campus office at Mawson Lakes, which Knight Frank sold to GDA Diversified Property Trust for $28.2 million, at a 7.06% core market yield.
“In addition, 1 Richmond Road in Keswick and 104 Frome Street in Adelaide have both exchanged unconditionally.
“We expect an increase in CBD transaction activity to around $140 million, by volume, in the first half of 2024. While still below the $170 million half yearly average since H1 2021, if settlement is achieved, these transactions will provide investors with renewed confidence.
“Looking ahead, higher funding costs are a clear risk to the outlook. However, it is clear financial markets expect the rate hiking cycle from the RBA has peaked, with markets signalling a potential rate cut this year.”