Archive for the ‘Australia’ Category

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Reflecting On A Major Australian Office Occupier: The Public Sector

Thursday, May 23rd, 2013

There are in excess of 550 local government areas in Australia, a state or territory government for each of our eight jurisdictions and one federal government. The public sector’s requirement for office accommodation is a very large one indeed.

In the departmental annual reports of state and territory governments, office accommodation is commonly cited as the largest expense in a budget, after staff salaries. This resonates in my home city of Perth, where unprecedented rental growth in recent years has been fuelled by the private sector’s demand for office space. Prime gross rents in our central business district (CBD) averaged AUD 331 per sqm per annum in March 2003, before almost tripling to a peak of AUD 956 per sqm per annum in December 2008.

To manage rising expenses, office portfolio planning is essential. Efficiencies can be enhanced through the consolidation of multiple premises at one address, a reduction in workspace ratio, investment in improving a building’s environmental credentials for longer-term reward and decentralisation to more affordable suburban locations. A decrease in headcount is another option. As my colleague, Peter Guevarra, noted last week in relation to Brisbane, significant Queensland public sector downsizing is impacting on vacancy and net absorption in that city’s CBD.

Property occupied by the mid-tier of Australian government is not always centrally managed. Tasmania is one such example where each agency is responsible for managing its own portfolio. In Western Australia, a branch of the Department of Finance oversees the state government’s office needs. According to the Department’s website and as at June 2012, the government was occupying around 555,000 sqm of office space state-wide. Tenure varied between owner-occupier (19 buildings) and tenant (around 510 leases with private sector owners).

From a landlord’s perspective, based on evidence we have seen in Perth over the last nine months, the state government is an ideal office tenant. Tight equivalent yields, high values and foreign purchasers were common themes in the sales of Optima in suburban Herdsman and a 50% share in the Perth CBD’s Old Treasury development. With the Department of Justice pre-committing to the latter for 25 years and agreeing to annual rental increases, the asset is akin to owning an Australian government bond.

About the author
Anna Garvey is a Research Analyst for Jones Lang LaSalle in Australia, based in Perth.

Posted in Australia, Occupier Strategies, Office Research | No Comments »

Is There A Silver Lining To The Brisbane Office Downturn?

Thursday, May 16th, 2013

The Brisbane CBD office market has endured a very turbulent 12 months. At the beginning of 2012, Brisbane was one of the strongest office markets in Australia. Twelve months later, the opposite is true. Brisbane is now the weakest CBD market nationally based on overall vacancy. Vacancy over Q1/2013 increased from 9.9% to 12.9%, while negative net absorption of 57,000 sqm was the largest decline on record for this market. What caused this market to turn from a bull to a bear so quickly, and what are the implications for developers and investors?

Falling demand from two key occupier groups – the public sector and the mining sector – caused the rapid market downturn. A newly elected state government initiated public sector downsizing in the order of around 14,000 full time positions. With the government previously occupying roughly 20% of all stock in the CBD, contraction in the government footprint by around a quarter is having a severe impact on the market. This is expected to continue in the short term.

Demand was also weakened by significant consolidation among resource sector tenants. As the peak of the investment phase of Australia’s mining boom nears, firms are focusing on cost containment, with real estate a non-core area where costs can be minimised. Coal mining firms in particular have been quick to cut costs given lower commodity prices and slowing demand. During Q1/2013, Rio Tinto and Xstrata Coal both relinquished a significant amount of space in the Brisbane CBD.

Surprisingly, despite the tougher leasing conditions, both the development and investment markets have remained relatively solid. Investment capital is still firmly focused on prime assets and two new large developments (480 Queen Street and 180 Ann Street) are likely to commence construction imminently. Along with the falling cost of debt and relatively high cap rates, a key to understanding this apparently contradictory dynamic is recognising the two-tiered nature of the market.

Government and mining sector tenants primarily withdrew from secondary space. Consequently, as the chart below shows, the secondary vacancy rate increased to 16.6% over the quarter and is now double the prime rate (8.3%). While overall demand conditions worsened, the prime end held up relatively well, illustrated by several large leasing mandates currently in the market. These leasing requirements, coupled with limited availability of prime contiguous space, have given developers confidence to proceed with existing schemes in spite of the higher overall vacancy, with the 58,000 sqm 180 Ann Street project completely speculative and the 55,000 sqm 480 Queen Street development 50% leased.

The stability at the prime end has also underpinned solid investment activity, with sustained capital focus on high quality real estate. Assets with long WALEs, strong lease covenants, and small capex requirements are key acquisition targets for the many institutional funds currently in the market, supporting prime yield compression of 25 basis points at the upper end of the range in Q1/2013. While we expect the prime end of the market to continue to hold up relatively well, a key question is what will become of secondary stock, particularly given the now higher pace of obsolescence?

About the author
Peter Guevarra is a Market Research Analyst for Jones Lang LaSalle, based in Sydney, Australia.

Posted in Australia, Office Research | No Comments »

Competition In The Australian Retail Sector Drives Sale And Lease Back Transactions

Friday, May 10th, 2013

As we all know retail is a fiercely competitive industry and one that is always evolving. Retailers are continually finding new ways to adapt to changing trends in fashion and spending habits, leveraging the power of information through new technologies and refining their business models to get the best competitive advantage. Property has been a big part of this strategy and in this blog I’d like to outline some of the ways retailers are transferring their real estate assets from their balance sheets to institutional investor ownership.

Since the global financial crisis, Woolworths and Wesfarmers have had to develop their own neighbourhood shopping centres and freestanding hardware store warehouses in order to facilitate the expansion of their store networks because there has been a low level of participation by private developers. Private developers have been deterred for feasibility reasons, specialty store leasing challenges and a general low risk appetite, but the retailers have been able to undertake developments at cost or on low margins. As a result, both groups have accumulated substantial property holdings through development and have been undertaking a number of major sale and leaseback transactions.

In 2011, Woolworths sold a portfolio of eight shopping centres to a joint venture between Charter Hall and Telstra Super for AUD 266 million. Then in 2012, Woolworths also completed an initial public offering of a new A-REIT called Shopping Centres Australasia (SCA Property Group) comprising 69 centres that were valued at AUD 1.406 billion.

Bunnings (the hardware store subsidiary of Wesfarmers) sold a portfolio of hardware store warehouses to BWP Trust for AUD 241.71 million in 2011 and a portfolio for AUD 206.7 million to Charter Hall and Telstra Super in 2012. In May 2013, on behalf of Coles (the supermarket subsidiary of Wesfarmers), Jones Lang LaSalle sold a 75% share in a AUD 532 million portfolio comprising 19 shopping centres to ISPT (an Australian superannuation fund). Wesfarmers will retain a 25% share in the portfolio plus management and development rights over the centres. The joint venture also allows for future properties to be acquired as opportunities arise.

Between these five major transactions, a total of AUD 2.52 billion worth of retail assets have been transferred from the balance sheets of these two retailers into the hands of institutional investors. By releasing a large portion of their property holdings, they have been able to unlock capital that can then be re-invested into more productive ventures within their core businesses and fund future store expansion programs.

These recent transactions show there are clearly various structures and options available for retailers looking to sell down real estate holdings and there are a number of other major retail groups reviewing their options. Further, demand from large passive institutional investors continues to strengthen and is making the case even more compelling for retailers to undertake sale and lease back transactions to potentially capitalise on the liquid capital market conditions.

About the author
Andrew Quillfeldt is a Manager and National Retail Analyst in Jones Lang LaSalle Australia, based in Sydney.

Posted in Australia, Investment Research, Retail Research | No Comments »

Parramatta, Sydney’s Second CBD Or Satellite Market?

Tuesday, May 7th, 2013

The Sydney office market can be characterised as a “planet” with the Sydney CBD at the centre and with satellite precincts at varying distances around it. Within the Sydney office market, Jones Lang LaSalle monitors ten precincts. Parramatta currently is the fourth largest by total stock (716,000 sqm) behind Sydney CBD (4.9 million sqm), Sydney Fringe (926,000 sqm) and North Sydney (848,000 sqm). The Parramatta office precinct is located 24 kilometres west of the Sydney CBD and is the geographical centre of Sydney from a population location perspective. Although Parramatta is some distance from the Sydney CBD, Parramatta has many of the amenities of CBD locations, with significant population driving employment, major retail outlets and public transport servicing the area.

Since 2000 the New South Wales Government has decentralised a majority of its departments to Western Sydney, with Parramatta CBD the prime location to service the Western Sydney area. Government Administration and Defence Industry categories make up 49% of total take up followed by Finance and Insurance companies who make up 25% of total take up since 2008.

With the projected increase in population and workforce in the Western Sydney region there are currently congestion issues within the Parramatta CBD, where eight strategic roads converge. To address these problems there are currently two infrastructure projects under consideration: the Western Sydney Regional Ring Road and Western Sydney Light Rail Network to connect to nearby suburbs where the current heavy rail network does not service.

Parramatta Council is a significant player in the future development pipeline as it owns large tracts of land in the central CBD area suitable for development. The council intends to develop a mix of residential, public and commercial spaces in the next 5 to 10 years. Currently there are no significant developments (≥ 5,000 sqm) under construction, however, 134,100 sqm of commercial space is planned to be developed in the next 5-10 years including Parramatta Square.

Parramatta has an overall vacancy rate of 8.4%, however this market has the lowest A-Grade vacancy rate of all monitored markets in Australia at 1.8%. As a result Parramatta is currently unable to attract tenants seeking desirable A-Grade office with large enough floor plates to accommodate their needs.

Across the Sydney markets, Parramatta has the fourth lowest average prime effective rents (AUD 306 per sqm p.a.). However there is competition from comparable suburban office markets (Macquarie Park, Homebush/Rhodes, South Sydney) with closer proximity to the Sydney CBD and with available vacancy with floor plate sizes that prospective tenants desire. Therefore the combination of available green space with large efficient floor plates, lower effective rents and proximity to the CBD may lead tenants to choose other suburban precincts to meet their space needs. Future development depends in part upon infrastructure investment to turn Parramatta’s location at the geographical centre of Sydney into a positive for employment growth. In the next few decades, with significant development of modern office space and imaginative planning, Parramatta has the potential to become Sydney’s second CBD market.

About the author
Leighton Waugh is a Research Analyst for Jones Lang LaSalle, based in Sydney, Australia.

Posted in Australia, Office Research | No Comments »

Refocussed Attention On Sub regional Centres In Australia

Thursday, May 2nd, 2013

An increasing level of attention has been focused on Australian sub-regional shopping centres recently. So what is a sub-regional centre? A sub regional centre is a mid sized mall that consists of at least one discount department store and one or more supermarkets plus a number of specialty shops. According to Jones Lang LaSalle, there is approximately 4.5 million square metres of sub-regional space in Australia’s metropolitan areas.

A diverse range of investors are directing their attention toward this category of retail assets and sales volume has been progressively increasing over the last few years. In Q1/2013 alone, sub regional transactions totaled AUD 546.2 million, equivalent to 56% of total sub regional transactions recorded in 2012.The increasing investor demand is demonstrated by the sub regional assets bought over the last few quarters. From the last couple of sub-regional sales that settled, we have seen:

  • A superannuation fund purchased a portfolio of sub-regional assets across Australia. Over the past two years, the only superannuation fund to have invested into these assets was through a joint venture scheme.
  • Unlisted wholesale funds that have been newly created for wholesale investors to specifically target quality sub regional and neighbourhood shopping centres.
  • A-REITs have been quite active over the last few years in buying sub regional centres because it is part of their current acquisition strategy.
  • A global investor bought a sub regional asset directly in Q1/2013. To gain exposure to the sub regional centres in Australia, international investors have commonly invested indirectly through an Australian unlisted fund. This direct purchase is the first to be recorded since 2009.

    • In addition, landlords commencing refurbishment and extension projects to existing centres and construction of new sub regional centres are another form of investment into this retail sub sector. The sub regional supply pipeline has been gradually recovering from the trough in 2010. Commencement of projects was limited through 2008 and 2009 because project viability was negatively impacted by the challenging leasing environment and the difficulty in obtaining finance. However, project starts in 2012 were 68% higher than in 2011 (on a total square metre basis) and in 2013 may be double the level recorded in 2012, if they commence as scheduled. Major sub regional projects currently under construction include:

  • Craigieburn Central in Melbourne – Lend Lease started their AUD 330 million construction on this sub regional centre (55,000 sqm) in early 2012 and completion is expected to be late 2013. On completion, this centre will be the first brand new sub regional centre to complete since 2011.
  • Cockburn Gateway in Perth – private Perron Group began their AUD 110 million refurbishment and extension (30,000 sqm) to the existing sub regional centre in early 2013.

    • Hence as the retail environment in Australia has been improving, increasing focus is expected to continue to be placed on sub-regional centres, either through direct investment or landlords upgrading or establishing new sub-regional centres.

    About the author
    Anita Tang is a Research Analyst for Jones Lang LaSalle, based in Sydney, Australia.

    Posted in Australia, Retail Research | No Comments »

    The Docklands Melbourne – Western Edge Or Western Core?

    Friday, April 26th, 2013

    Docklands comprises a 190 hectare site, including 44 hectares of water. (Source: Places Victoria) The precinct, currently entering its second decade of development, houses 8,000 residents with a further 30,000 workers. Upon completion, the site could encompass over one million sqm of office space with over 60,000 workers, attracting more than 20,000 residents. Building on its current achievements, Docklands is 10 years into a 20 year development agreement with Places Victoria and 50 per cent of the precinct has already been developed.

    Docklands appears to have evolved ahead of expectations. It has successfully attracted high quality tenants and continues to boast high demand levels from corporates. So what is attracting tenants to this new location?

    In the early planning stages, it was recognised that successful, office development in Docklands would require a high degree of product differentiation to compete with the CBD, Southbank and St Kilda Road. Rather than a competitor to the Melbourne CBD, the significant driving force behind the success and rapid development of Docklands has not only been achieved through organic growth within the CBD but the quality of stock, which is focused on low rise campus style buildings encompassing large efficient floor plates. Large corporate occupiers wanting improved efficiencies combined with more flexible office space have been able to achieve this in the Docklands precinct.

    Since 2000 the geographical boundary of the Melbourne CBD has evolved, notably elongating as new development stretched into the Docklands. The late 1980’s / early 1990’s was characterised by a number of new towers stretching the original boundaries as far to the West at 600 Bourke and further down towards the Eastern end of Collins Street. With this emerging development, the Western end of the CBD continued to expand incorporating the Docklands and successfully attracting large corporate occupiers consequently shifting the heart of the CBD further West. Like the Southbank, occupiers were initially hesitant to relocate to Docklands, perceived as an area with limited transport infrastructure, amenities and at some distance from the traditional CBD. In 2001, National Australia Bank (NAB) was the first occupier to commit, taking a pre-let on 56,000 sqm at 800 Bourke Street. Medibank, ANZ and AXA all followed soon after, and by 2010 Docklands had attracted a core financial base of corporate tenants who had all relocated their headquarters to the precinct.

    With the completion of Collins Square, Building 1, 850 Collins Street and 990 LaTrobe Street in 2012, Docklands has overtaken the Eastern Core as the second largest office precinct for prime grade stock (by NLA) in Melbourne, comprising 500,000 sqm or 21% of the CBD area. Docklands has only 226,000 sqm less than the Western Corridor, the CBD’s largest Prime grade precinct. Docklands will continue to grow over 2013 with the completion of Collins Square Building 2 and 700 Bourke Street bringing total prime grade stock in the precinct to 566,500 sqm. With 66% of CBD projects under construction in Docklands (156,700 sqm) it is feasible that within the medium term Docklands could challenge the Western Core as Melbourne’s most prominent office precinct.

    Whilst still heavily financially driven, Docklands is now at the stage, similar to the Southbank, where a broader range of tenants are demonstrating an interest in the area. By positioning itself as an extension of the Western core for corporate, financial and services tenants, Docklands will continue to expand as a focal point for office development. Given the capacity of the precinct for more development, over the long-term, the precinct could be home to nearly one million sqm of prime grade stock – making it fast become a core location within the Melbourne CBD.

    About the author
    Kimberley Paterson is the Senior Analyst of Research for Jones Lang LaSalle, based in Melbourne, Australia.

    Posted in Australia | No Comments »

    What Australia’s Changing Economic Drivers Mean For Office Demand

    Monday, April 15th, 2013

    Australia’s office markets unequivocally softened in Q1/2013. Negative net absorption of 90,700 sqm was recorded across the six major capital city markets and vacancy across these markets rose from 8.8% to 9.9% in the quarter. For investors this raises the question of whether the Australian economy is now finally experiencing the global economic weakness that it has largely been insulated from by the resources boom, or is this just a temporary soft-spot as economic drivers switch from external to domestic drivers?

    There can be no question that Australia’s growth drivers are in transition. The chart below shows that private construction investment made very large contributions to Australian GDP growth in 2011 and 2012, which largely reflects unprecedented levels of resource sector investment. In 2011 (and also earlier) this impact on growth was somewhat offset by a surge in imports of large capital goods for these projects. Consumer imports were also boosted by a strong Australian dollar, but this impact faded in 2012 and net exports (exports less imports) were no longer a drag on GDP growth.

    The investment phase of Australia’s resource boom now appears over and the sector is now in a cost containment mode. Private construction investment is expected to remain at a high level over the next two years, but not contribute as much to GDP growth. Eventually, mining investment will start to fall more significantly and is forecast to subtract from GDP growth in 2015. This fall will be offset by higher exports as resource project complete, but also by more solid contributions to growth over the next few years from parts of the economy that have been weaker over recent years, such as retail spending, housing investment and general business investment in equipment and machinery.

    So is this transition of economic drivers on track? All recent indicators suggest that it is. Consumer sentiment has been relatively strong for the past five months and this has flowed through to stronger retail turnover growth in early 2013. Leading indicators of the housing market have also improved, which are backed up by our own liaison with residential developers that suggests sales rates have picked up in 2013. It appears Australian consumers are finally feeling confident enough to capitalise on lower interest rates and not delay major consumption and housing investment decisions any longer.

    For the office market, it will take some time for this embryonic domestic recovery to flow through. Businesses will want to see a sustained improvement in consumer spending before they have the confidence to expand and hire. In the short-term, the market is still suffering from the slowdown in demand from the resource sector and from public sector contraction in many states. Nevertheless, the seeds are being sown for a broader recovery in business confidence and spending and the bottom of this office demand cycle should already be fast approaching.

    About the author
    Leigh Warner is a Director of Research for Jones Lang LaSalle, based in Brisbane, Australia.

    Posted in Australia, Economic Research, Office Markets | No Comments »

    Secondary Grade Industrial Asset Pricing: A Rising Tide Lifts All Boats?

    Tuesday, March 26th, 2013

    The commercial property investment market in Australia is heating up. Industry practitioners and commentators are again focused on yield compression. Most discussion has been about how much yields will compress this year, not if it will happen.

    The majority of analysis has focused on the prime segment of the market. The Jones Lang LaSalle Research view is that further moderate yield compression for prime grade assets is likely this year; better quality assets – or ‘super prime’ assets – will see the majority of yield adjustment, resulting in wider spreads in the prime yield range and wider spreads to secondary assets.

    What of secondary grade asset pricing? What ever happened to the phrase “a rising tide lifts all boats”?

    I have outlined three reasons why secondary grade industrial asset re-pricing could occur in 2013:

    1. Yield spreads. Average secondary grade yields are at historically very high spreads to prime grade assets and government bonds and the spread within the secondary grade yield range itself is historically wide.
    2. Changing sentiment. More investors are indicating they will go up the risk curve this year. A number of institutional investors plan to start value-add style industrial funds. Sentiment toward both value-add investing and the industrial sector as an asset class is shifting favourably.
    3. Demand and supply. The volume of secondary grade asset sales decreased in 2012. The sell down of ‘non-core’ assets by institutional investors is winding up. At the same time, private investors – who dominated the purchaser environment in 2008 and 2009 – are coming back into the market. The debt market is now more favourable for leveraging into higher yielding assets. Meanwhile, the return on fixed interest investments has deteriorated in line with lower interest rates.

    Purchasers of industrial assets will review three key factors when assessing opportunities:

    1. The tenant – income quality and duration of lease term
    2. The building – age and specification of the building
    3. Location – close to major road infrastructure, ports, customers or workforce

    Investors may decide two out of three isn’t bad and accept a shorter lease expiry profile for a good building in a good location. Or decide a poor building in a good location with a strong covenant and long WALE is acceptable. We generally don’t expect firmer pricing for assets that are only strong on one of these criteria.

    Watch closely for evidence of secondary grade price firming throughout the year. This may result in even wider spreads in the secondary yield range as better quality secondary assets are re-priced. We don’t expect that there will be a sufficient shift in the risk appetite of investors this year to warrant significant tightening at the upper end of the secondary yield band in most markets, given it remains a tough selling environment for this type of asset.

    We retain our central house view that prime grade yields will firm this year and the average yield spread to secondary grade assets will widen further. At some point though, investors will step in and absorb some of this growing spread. Time will tell.

    About the author
    Nicholas Crothers the Director of Industrial Research for Jones Lang LaSalle in Australia, based in Sydney.

    Posted in Australia, Construction, Industrial Research, Investment Research, Valuation | No Comments »

    Will We See Yield Compression In The Aussie Super-prime Cohort?

    Friday, March 15th, 2013

    Prime-grade assets in gateway cities are, increasingly, being viewed as substitute products. Australia’s gateway city is Sydney, but international investors would also include Melbourne, Brisbane and Perth as plausible investment destinations.

    The specific investment criteria of passive offshore capital, unlisted funds (including superannuation funds) and some A-REITs are generating competition for a specific type of product. The characteristics of the product include: Premium or A Grade (in excess of 20,000 sqm to 25,000 sqm and less than five years old), strong covenants, long weighted average lease expiry (with fixed increases) and, increasingly, the highest sustainability credentials.

    We have termed this product the “Aussie super-prime”. While Jones Lang LaSalle monitors more than 4,000 assets across 19 office markets in Australia, at a market value of $151.5 billion, the super-prime cohort is limited to between 50 and 55 assets.

    Development is the main source of product creation in the super-prime cohort. Australia, like other mature economies, has experienced a cyclical slowdown in development activity since the financial crisis. Jones Lang LaSalle has identified 13 qualifying developments that would meet the definition of super-prime across office markets. Very few of these assets, however, will present an investment opportunity for offshore or well-capitalised domestic investors. The assets are being developed by a property company or superannuation fund that intends to be a long-term holder of the finished product or have been acquired under a fund-through agreement.

    The vacancy rate across Australian CBD office markets is 8.8%. Historically, equilibrium vacancy was assumed to be between 7% and 9%. There is, however, a symbiotic relationship emerging between tenant, developer and investor. Large corporate occupiers are looking for the next generation of office accommodation, incorporating the latest sustainability credentials, to make efficiency gains and improve productivity across their business. However, a high proportion of Australia’s stock reflects the design and characteristics of the 1980s or earlier. Across the CBD office markets of Sydney, Melbourne, Brisbane and Perth, 42% of stock is in excess of 30 years old. Developers seek to secure pre-commitments to under-write future earnings, while investor demand is strong for product with long dated leases that are offered through development stock.

    The inter-play of these factors is supporting asset creation in Australia and accelerates the obsolescence of older assets, creating structural vacancy within this sector of the market. As a result, the equilibrium rate in Australian office markets is likely to be higher, at between 8% and 10% over the next decade.

    Property yields have remained relatively sticky following the decompression throughout the global financial crisis. Nevertheless, Jones Lang LaSalle is not a subscriber to the argument that property yields will precipitously follow Treasury yields down to the extent recorded in a number of offshore markets.

    However, the increased depth of investor demand for Aussie super-prime assets and the relative scarcity of these assets will generate pricing tension and yield compression. This year will be the year that yields on the super-prime cohort of assets will start to lose their adhesiveness.

    About the author
    Andrew Ballantyne is a Director for Jones Lang LaSalle in Australia, based in Sydney.

    Posted in Australia, Capital Markets, Investment Research | No Comments »

    Adelaide Office Market- stuck in the 1980’s?

    Wednesday, March 13th, 2013

    In 2011, the Oscar-winning producer of ‘The King’s Speech’ filmed scenes for a movie set in 1980’s Perth, in Adelaide, because Perth had “too many sky-scrapers and looked too modern”. Conversely, Adelaide “remained mostly unchanged since the 1980’s”. This is reinforced by the fact that over 75% of stock in the Adelaide CBD was built over 20 years ago. In addition to the age of stock, Adelaide has the lowest proportion of prime grade stock of all monitored capital city markets in Australia (Figure 1). Just 32% of Adelaide stock is classed as prime, compared to the national average of 51%. At the other end of the scale, Canberra has the highest proportion of prime grade stock, which was due to a boost in government led pre-commitments for new buildings over the past 10 years.

    The ‘Flight to Quality’ trend has been reported widely over the last three years, as tenant preference in office space has led to a shift in occupancy from secondary stock to prime. The ongoing demand for quality stock has led to a structural undersupply of prime space. Consequently, vacancy has remained relatively stable for prime grade stock (5.9%), whereas secondary vacancy has crept upwards, reaching 14.0% at the end of 2012. This is the largest gap between prime and secondary vacancy in the Adelaide market in over 10 years, and is much higher than the national average of the difference between the two grades for the past 10 years (2.25%).

    Not only is vacancy significantly lower in prime office space, the potential for higher rental returns is also clear. Currently, gross effective rents are AUD$369 per sqm p.a. for prime office space and AUD$260 per sqm p.a. in secondary buildings, based on a hypothetical 10-year leasing deal.

    The age profile and quality of the Adelaide office stock has led to a disconnect between tenant preferences and the majority of secondary stock. Properties with good functioning floor plates, ability to adapt to the latest technology, and sustainability credentials have featured highly on tenants’ wish-lists. Other features, including a high amount of natural light and a modern design and feel also set prime stock aside from the older secondary stock in the Adelaide market.

    A factor which may set Adelaide apart from the other capital cities is that a high proportion of office stock is held by local private owners, who are passive in their investment strategy. Perhaps the high vacancy levels over a prolonged period or a significant gap between rents achieved in a particular property and new space entering the market, may be the impetus for development activity in the future.

    The current dynamics at play within the Adelaide office market present an opportunity for owners of secondary stock to reposition their property and take advantage of continued levels of tenant demand and higher rental returns.

    Figure 1: CBD Office Markets Proportion of Prime Grade Stock

    Source: Jones Lang LaSalle Research

    About the author
    Brianna Chappell is a Strategic Analyst for Jones Lang LaSalle, based in Adelaide, Australia

    Posted in Australia, Construction, Office Research | No Comments »

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