Adelaide office market undergoing contraction: HTW
Contraction has been the underlying theme in Adelaide’s office market in the past 12 months and the large vacancies created by multi-national tenants have caused a ripple effect down into the below $10 million market, according to valuation firm Herron Todd White’s latest April update.
Not surprisingly, Adelaide is at the bottom of the market cycle in HTW’s commercial property clock for offices.
Over the past 12 to 24 months, the downturn in business activity throughout South Australia has created vacancies with the likes of Santos, BHP and Telstra all contracting their tenancies into smaller, compact areas.
Investment activity within prime assets that provide secure lease covenants and long WALEs is expected to remain strong over the next 12 months.
“Similarly, we don’t anticipate there being a significant change to the risk-averse pricing of lesser quality assets being 30% to 40% below prime assets,” say HTW.
However, the construction phase in the CBD office market is coming to an end. There are a few major projects due to in the short to medium term:
- Frome Flinders office building is now finished and part occupied by Grant Thornton.
- 113-115 King William Street, Adelaide’s sixth tallest building at 25 levels and 5,799 square metres.
The completion of these building has contributed to the increase in Adelaide total vacancy to 16.2% from 15.4% in January 2017.
There are analysts reporting that the contraction of space has slowed and with the limited planned addition of space, that vacancy will contract over the next 12 months.
When you break down the vacancy rate, the majority sits in lower grades.
“We consider that a period of rejuvenation will begin, however this is unlikely to result in significant new office space in the short term. As it starts it will take lower grade buildings off the market and place downward pressure on the vacancy rate,” say HTW.
There also exists the possibility of buildings being converted to residential accommodation. A number of residential developments will soon be competed which will increase the number of units in the market. The depth of this unit market may be tested and likely to delay future conversion of any obsolete office buildings.
There is however a sense that the period of high vacancy may be beginning to end, concludes HTW.