Demand for quality Adelaide office space to drive up rents

Prime Adelaide office rents are expected to rise over the next two years due to an increasing demand for quality space, a current shortage of new development and limited vacancies. 

There has already been pressure on rental rates over the past 12 months, with increases of between 7% and 8% noted by valuer Herron Todd White HTW in its November market report. 

“Rental growth is expected to continue over the next two years or so and incentives are also expected to reduce over this time,” the report says. 

According to an October Savills report on the Adelaide office market, the prime grade vacancy rate (Premium, A Grade stock) stood at 6.84% at the end of June 2011, with just seven full floors and 10,429 square metres available for lease. 

Available premium space stood at just 2.1% as of July 2011. 

The Property Council of Australia recorded the overall office vacancy rate (including B, C and D grade) fell to 7.9% in June 2011 compared with 8.4% in January 2011. 

According to the November HTW report, Adelaide office tenants demand for “improved standards of accommodation, better services and energy efficient features” is continuing to drive the demand for prime quality stock over second-grade buildings. 

“This may in turn increase demand for secondary stock as investors look to value-add by refurbishing secondary stock in order to retain or attract tenants and to increase rental growth in the longer term.” 

The report notes that tenant activity has been on the increase since the end of 2010 and has been mostly driven by smaller leases under 1,000 square metres, possibly due to the lack of large office areas currently available. 

To date yields have been relatively stable at between 7.5% and 9.5%. 

However with vacancy rates decreasing and rents increases, yields are starting to tighten and are expected to “slowly contract even further to more traditional levels in the next 12 months or so”. 

The demand for high-quality office space is also encouraging developers to consider new projects in the Adelaide market. However, according to the HTW report, significant pre-commitment is required before any of these projects will get off the ground. 

There are currently three new office buildings under construction in the Adelaide CBD, with almost 100% pre-commitment. 

These are the new South Australian Police Headquarters at 130 Angas Street (18,000 square metres) which is close to completion, City Central tower 8 at 12-26 Franklin Street (36,000 square metres) with completion expected toward the end of 2012 and Rundle Place at 90-100 Grenfell Street (28,000 square metres), with completion due in 2013. 

A 17,000-square-metre office block at 18 Flinders Street, due to be completed by June 2014, has received development approval. 

Recent sales include MTAA Super House at 55 Currie Street, Adelaide, which sold for $81 million in May this year for a yield of 9.41% and 77 Grenfell Street which reportedly sold in an off market transaction in June 2011 for $91.7 million, a yield of 7.5%. 

These are the highest sales for an office building in Adelaide since 2004.

 

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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