Adelaide office market has peaked: Property Council

Commercial property experts believe the Adelaide office market has peaked, with vacancy rates set to rise as more office stock comes on board over the next 12 months. 

According to The Property Council’s latest Office Market Report, the core (inner-CBD) Adelaide’s vacancy rate declined from 7.5% to 7.3% while the CBD vacancy rate fell from a six-year high of 8.4% to 7.9% over the six months to July 2011. 

Premium-grade vacancies decreased from 3.8% to 2.1%, the lowest level since January 2007. 

In the six months to July 2011, Adelaide recorded a net absorption of 6,633 square metres compared with a net absorption rate of 302 square metres for the previous six months.

However, according to South Australian Property Council (SA Division) executive director Nathan Paine, a significant amount of new supply will enter the Adelaide office market over the next 18 months: 20,812 square metres in the remainder of 2011, and more than 40,000 square metres in 2012. 

“While much of this future space is pre-committed, it will take some time for the market to digest all of the new supply and back-fill space,” he says. 

Newly completed A-grade core office space includes the $100 million 12-floor Aurora on Pirie Tower 1 with 13,000 square metres of space developed by Adelaide developer Urban Construct. A second tower of similar size is also planned for Pirie Street.

Knight Frank director of leasing in Adelaide Martin Potter also expects the increased supply to push up vacancy rates. 

“Adelaide has experienced positive net absorption over the past 12 months, however new supply coming onto the market in the next two years will see an increase in vacancy particularly, for the back fill space,” he says. 

Potter says the Adelaide market has been characterised by a flight to quality stock continues with prime stock showing low vacancies, with the lower grade properties still experiencing double digit vacancy. 

“Demand for Prime office space should see continued development; however two tiered markets will see movement away from C- and D-grade stock,” he says. 

CBRE director of office services Andrew Bahr has also noticed patchy conditions in Adelaide. 

Bahr says caution has prevailed in Adelaide in the first six months of the year, with concern over capital costs continuing to be a key issue. He says companies are staying put in their current offices and not moving, which is hurting the market. 

“A real stalemate exists in regard to demand and supply and large amounts of high-quality contiguous space will be in limited supply until late 2012 or early 2013.” 

Bahr says there had been a slight increase in activity in the past month and this trend is expected to continue over the next six to 12 months. 

However, he also has concerns about the local market being able to absorb new office space in the next few years. 

“A concern in 2013 is the fact that some 50,000 to 60,000 square metres of secondary space will be coming on the market, and has our local market got the capacity to absorb this much space?”