Adelaide offices’ net absorption records first positive quarter since 1Q20

Net absorption hit 1,800sqm in the second quarter of 2021.

After continuous negative net absorption levels in the office market, Adelaide finally recorded a positive net absorption of 1,800sqm in the second quarter of 2021. JLL says this positive quarterly figure was driven by occupier demand for higher quality office accommodation. “Prime grade net absorption was 3,400 sqm. Conversely, secondary grade net absorption over the quarter was -1,500 sqm.”

According to JLL, major occupier activity in 2Q21 was a mixture of expansion and upgrade activity, counter-balanced by consolidation and contraction. The largest major occupier move in 2Q21 was co-working firm Hub Australia leasing 2,100 sqm at 89 Pirie Street, expanding from 800 sqm at 5 Peel Street.

Here’s more from JLL:

The next wave of supply expected in late 2022 to early 2023

The first completion of 2021 was recorded in 2Q21 with an 1,800 sqm refurbishment-extension completed at 21-24 North Terrace. The reintroduction of this building added 3,700 sqm to total stock. There is currently 88,600 of supply under construction with completion estimates ranging from 2Q22 to 3Q23. Major projects include 52-62 King William Street (40,000 sqm) and 73-85 Pirie Street (30,000 sqm).

With net absorption marginally positive, headline vacancy was unchanged at 16.9%. The prime vacancy rate decreased by 0.6 percentage points to 14.8%. Conversely, the secondary vacancy rate increased by 0.5 percentage points to 18.4%.

Average prime gross effective rents increased in 2Q21

Average prime net face rents and outgoings increased in 2Q21. Average incentives were unchanged at 37% (based on months-free on a 10-year lease). As a result, there was a moderate 1.4% uplift in average gross effective rents to AUD 297 per sqm per annum.

Average yields across both prime and secondary grades held firm in 2Q21. Prime yields currently range between 5.00% to 7.00%. Secondary yields currently range between 6.00% to 8.50%. Investor demand broadly has been positive for office assets in the Adelaide CBD with yield compression of 13-25 basis points recorded in the second half of 2020 across both grades.

Outlook: Transaction activity expected to increase over the short term

The ongoing recovery in occupier demand is expected to result in positive net absorption over the balance of 2021 and into 2022. However, unleased new supply entering the market in 2022 is a downside risk to vacancy levels.

The current elevated vacancy rate in Adelaide CBD is expected to result in an uplift in incentives over the next 12 months. This, in turn, will place downward pressure on effective rental levels. In the capital markets space, it is expected that ongoing investor appetite for higher quality assets in the Adelaide CBD will result in further compression of prime grade yields.

Note: Adelaide Office refers to Adelaide's CBD office market (all grades).