Adelaide to see robust office occupier demand in 2022

Demand will mostly come from technology, health and the defence sectors.

JLL recently reported that net absorption in Adelaide’s office sector reached 7,900 sqm in 3Q21, representing the strongest quarter of net absorption recorded in the market since 3Q18. 

“Occupier demand for prime grade space was very strong, totalling 13,800 sqm for the quarter - the highest quarter of prime net absorption since 2012. However, this was counterbalanced by weak demand for secondary space, which was -6,000 sqm for the quarter,” the analyst said.

Here’s more from JLL:

The strong positive quarterly net absorption was driven largely by public sector expansion. The majority of space absorbed by these expanding government departments was in the sub-lease market, removing a substantial amount of sub-lease space that was offered to market by occupiers at the beginning of the COVID-19 pandemic. The sub-lease vacancy rate reduced from 2.3% to 1.5% in 3Q21. 

Prime grade vacancy decreases for consecutive quarters 

The positive occupier demand recorded in 3Q21 resulted in a moderate 0.5 percentage point (ppts) decrease in headline vacancy to 16.4%. Prime grade vacancy has decreased for consecutive quarters, reducing by 2.4 pps to 12.4%. Conversely, secondary vacancy increased by 0.7 pps to 19.0%. 

The next wave of supply will occur in late 2022 and 2023 when multiple premium grade towers reach practical completion. There is currently 88,600 sqm of supply under construction. However, this figure could increase to 183,200 sqm if a number of mooted developments secure satisfactory pre-lease thresholds. The 40,000 sqm Festival Plaza is expected to commence construction in 4Q21. 

Average incentives increase, driving effective rents lower 

Average incentives increased across both grades in 3Q21. While average net face rents increased marginally in both the prime grade (0.5% q-o-q) and secondary grades (1.1% q-o-q), the rise in incentives resulted in a decrease in effective rents. Average prime gross effective rents decreased 1.3% over the quarter. 

Average secondary gross effective rents decreased 3.3% in 3Q21. 

While transaction volumes remain low in 2021, investor demand is undiminished. As a result of this ongoing investment demand, prime yields compressed at the upper end to a new range of 4.75%-7.00%. This represents the first time on record that upper end yields have compressed below the 5.0% threshold. The secondary yield range was unchanged at 6.00%-8.50%. 

Outlook: Positive occupier demand expected to continue into 2022 

Positively, with most expected contraction and business rationalisation from private sector occupiers already accounted for over the first nine months of 2021, it is expected that annual net absorption will be positive over the next 12 months. It is expected that technology, health and the defence sector will underpin occupier demand. 

Investment demand is expected to continue for modern, well leased office assets. Additionally, investors seeking value-add opportunities will be looking for assets with current elevated vacancy or future vacancy risk that can be repositioned.