Adelaide CBD offices long-term outlook is superior to other capitals, CBRE reports

CBRE’s latest Viewpoint Report - Space, subs and science: is Adelaide becoming Australia’s smart city? – has revealed new insights indicating the strength of Adelaide’s prime office market. In particular, the report discusses the city’s supposed ability to deliver risk adjusted returns superior to Australia’s other capitals over the longer term.

The report highlights that while the South Australian economy has ostensibly been slow and steady, annual growth in state final demand on a per-capita basis has not only outperformed Australia’s other states over the past 20 years but also over the past three years.

CBRE’s Australian Head of Research Bradley Speers believes that a similar performance is likely over the next two decades, driven largely by investments in defence, resources and technology research, development and investment.

Adelaide has long held a reputation of enduring a ‘brain-drain’, which Speers argues could be on the decline should investments and developments progress as estimated.

“Curtailing the brain drain will support stronger growth in white collar employment over the next five years than what was recorded over the past 15 years,” Mr Speers said.

“This will lead to stronger tenant demand, generating rental growth that will boost the total returns generated in the relatively high-yielding prime CBD Adelaide office market. Historically, the Adelaide prime CBD office market has delivered risk-adjusted returns superior to Australia’s other capitals, and there is little reason to believe this trend cannot be sustained over the longer term.”

Investment in submarine and ship building programs, as well as the new Australian space agency, will see a rise in ‘smart jobs’, which CBRE suggest will have flow-on benefits for the city.

CBRE Office Leasing Senior Director Andrew Bahr noted that these groups have already begun to take up space, with Adelaide’s “new” Prime market profiting from it.

The “new” category consists of assets built after 2006, while the “old” category includes stock built pre-2006 which had received upgrades but typically offered smaller floor plates.

“Looking at the new prime sector in isolation, the vacancy rate is now less than 3% versus 20% for old prime stock,” Mr Bahr said.

“With the take up of new space continuing, this will flow into the other sectors of the market and lead to stronger net effective rent growth over the next five years.”

As this happens, more and more development and investment opportunities are liable to raise their heads.

In tandem, Adelaide’s CBD office sector is expected to stand out on a national basis as a low-risk/high-return market that will provide a good portfolio hedge against Sydney and Melbourne.

“Similar to growth in the South Australian economy, Adelaide office market total returns historically have demonstrated low volatility. However, Adelaide’s prime CBD office yields are typically higher than other capital city office markets,” Mr Speers said.

“This has contributed to Adelaide delivering higher total returns than all other CBD markets except Perth since 2001 and the best risk adjusted CBD returns, ahead of Melbourne and Sydney.”