Vacancy rates increase, tenants benefit

Vacancy rates in Adelaide’s office market are at their highest level in 14 years and will continue to edge up as a result of falling demand and increasing supply, according to a new research report by Knight Frank.

Adelaide CBD vacancy rates have increased significantly from 9.5 per cent in January 2013 to 12.4 per cent in January 2014, with 60 per cent of Adelaide’s prime CBD vacancy concentrated within three prime grade assets at 70 Franklin St (11,097m2), 100 Waymouth St (9,135m2) and 81-95 Waymouth St (16, 378m2).

Also weighing in on increasing vacancy rates is increasing supply, with 30,566m2 of new office space added to the Adelaide CBD market in the past six months and an additional 24,000m2 of secondary stock to become available in 2014.

Knight Frank Adelaide Managing Director, Mr Peter McVann said the current market is working increasingly in favour of tenants – affording them greater opportunity, better incentives and lower effective rents.

“Adelaide has the third highest vacancy rates for office space in the nation, and as they increase, the brakes will be applied to rental and value growth affecting landlords,” he said.

“Incentives for new leases are also increasing from 16 per cent to 20 per cent in the core, causing a 2.2 per cent decrease in prime gross effective rents – which will likely cause tenants to relocate to higher quality premises.

“Lower A-Grade and refurbished stock will then improve demand from smaller tenants seeking affordable leasing options.”

Average CBD prime gross face rents as at January 2014 were $489/m2 with gross incentives 19 per cent in comparison to 16.5 per cent at the same time last year. The spread between prime incentives for lease renewals and new leases is relatively large with renewal incentives averaging 10 to 15 per cent. Current average secondary gross face rents are $365/m2 with gross incentives also 19 per cent.

The market also recorded a positive net absorption of 5,818m2 for the six months to January 2014, of which 4,593m2 is prime stock and 1,225m2 is secondary.

“With growing vacancy rates there is no doubt that building owners will need to remain competitive by initiating refurbishments and increasing incentives as tenants become more and more selective,” he said.

“We expect refurbishment activity to increase in 2014, with refurbishment already underway at 167-275 Flinders St (1,700m2), 81-95 Waymouth St (16,378m2), 2-12 King William St (4,820m2) and 169 Pirie St (7,920m2).”

Investment transaction activity in excess of more than $10 million picked up in 2013, largely driven by two prime, core assets at 50 Flinders St and 45 Pirie St being acquired by investors for $140 million and $87 million respectively.
2014 has already seen significant investment activity with 44 Waymouth Street being acquired by an adjoining owner who is planning a refurbishment program to reposition the asset. Charter Hall has also recently announced a 50% acquisition of the new ATO building on Franklin Street.

Knight Frank Capital Markets Director Guy Bennett says “These transactions highlight the increase in institutional interest in SA, flowing on from high levels of transactions interstate.”

Notes to Editors

Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank and together with its New York-based global alliance partner, NewmarkGrubb Knight Frank, operate from over 370 offices, in 43 countries, across six continents and has over 13,000 employees. The Group advises clients ranging from individual owners and buyers to major developers, investors and corporate tenants. For further information about the Company, please visit www.knightfrank.com.

Further information: Please contact Peter McVann at Knight Frank