Supply and demand fundamentals favour Adelaide commercial market
Supply and demand fundamentals favour Adelaide commercial market
18 June 2014
Adelaide, 18 June 2014 –Adelaide has the lowest gap between supply and demand of any of the major commercial property markets in Australia – standing the city in good stead in the short to medium term.
That was the message from CBRE’s inaugural Adelaide Market Outlook breakfast, staged today at Adelaide Oval to examine the drivers and outlook for the city’s retail, office and industrial property sectors.
CBRE’s Australian Head of Research, Stephen McNabb, said Adelaide had benefited from its long term stability and was moving into a 1990’s style environment where economic growth would be export, consumer and housing led.
While the decline of the state’s car manufacturing industry will clearly have an impact, Mr McNabb said the health and educations sectors would help underpin economic growth moving forward. These two sectors account for 17% of South Australia’s GDP - above the national average of 14% - meaning the state was well positioned to benefit from these longer term demographic drivers.
At a property level, Mr McNabb said Adelaide had traditionally been a lower growth - but lower risk – market. The upside from that, particularly in the office sector, was that Adelaide had been among the top performing CBD markets over the past 15 years in regard to average returns (second only to Perth, which was a higher growth, but higher risk market).
“We are very close to the peak in vacancy for Adelaide whereas other CBD markets over the next four years will have a significant imbalance between supply and demand,” Mr McNabb said.
“Adelaide’s office market has the smallest gap between supply and demand and it will lead the country from 2015-16 in terms of its outlook and perform above the national average over the next three to five years.”
This will include an increase in net absorption, with most of that to come from the health and education sectors.
For the industrial market, Mr McNabb said transport and storage would be the key growth drivers as manufacturing continued to decline. Limited new construction will be the other positive for the market, with demand also expected to gradually improve over the next few years.
Low construction will also help drive growth in the Adelaide retail sector as well a recent resurgence in spending on household goods.
A panel discussion concluded the breakfast, with some of the key takeaways being as follows:
Office leasing - Andrew Bahr, Director, Office Services
A small rise in vacancy is still expected in the CBD from the most recent official number to circa 14%. However Mr Bahr said it was important to dissect the official Property Council vacancy statistics given that a number of leasing transactions had occurred and that much of the vacancy was in lower grade stock, with A and B grade buildings generally 90% occupied.
“We track demand very closely and there was a 25% uplift in enquiry in Q1 relative to Q4 last year,” Mr Bahr said.
“It’s a tenants’ market still but there’s a clear lack of supply, with only one building coming out of the ground that’s 90% pre-committed. Demand is continuing to improve and the fundamentals will flip around to landlords much quicker than in other states.”
Mr Bahr said tenants in today’s market were smarter and more educated and the focus for landlords should be on providing the best product, including such elements as end of trip facilities, to attract occupiers rather than it just being an “incentive race”.
Office investments – Phil Rundle, CBRE Adelaide Managing Director
Mr Rundle said Adelaide’s CBD building stock could be broadly characterised as new generation (constructed post 2006), prior generation or “the rest”.
All of the recent activity in Adelaide had involved the second two categories of stock, Mr Rundle said, and while institutional investors “liked the Adelaide story” the assets they were looking for had not been available.
“We haven’t seen any recent transactions in Adelaide of new generation buildings, which is what is expected to drive yields down,” Mr Rundle said.
“That’s why office yields in Adelaide are sitting in the low 8% range. However, I believe if we had a new generation building offered we’d see yields well into the 7% range.”
He also advised investors to consider “prior generation” buildings and to not shy away from some level of vacancy given the market fundamentals. This included the fact that there was a level of obsolence in the Adelaide CBD which meant the city’s true vacancy was closer to 12%.
Mr Reid said there was an undertow of strong demand in Adelaide from the logistics sector as evidenced by the Aldi commitment at Regency Park and the 25,000sqm Electrolux facility with Metcash also in the market for a large facility – all to cater to the local market.
The pressure had been felt in the secondary market, Mr Reid said, with functional obsolescence an issue for landlords whose facilities didn’t lend themselves to the requirements of the logistics sector.
Another trend was the move by some traditional industrial tenants to purchase their own facilities to capitalise on the low cost of debt.
Mr Reid added that there were also “emerging green shoots” in the pre-lease market, as highlighted by the recent Toll Energy lease of 7,000sqm the 10,000sqm Haliburton commitment and the circa 20,000 qm KJM facility at Edinburgh Parks.
Retail - Julia Pottenger, Manager, Retail Services
Ms Pottenger said circa 80% of the tenant activity in Adelaide had been driven by the food & beverage sector, which had been a particularly positive for the CBD. However, Ms Pottenger said national F&B retailers had struggled to get set, although not for want of trying over the past two to three years.
Grill’d was one of the national chains to have cracked the market with a store in Norwood and plans for several more outlets throughout the state.
Another opportunity for Adelaide was luxury brands, Ms Pottenger said, with the opening of Tiffany potentially providing an opening for other international retailers, given that South Australia was the only state without a grouping of luxury international brands.
“The issue is supply and finding suitable 2,000sqm CBD sites given the city market is so tightly held,” Ms Pottenger said.
Metropolitan Investments - Alistair Laycock, Director, Capital Markets
While much of the recent interstate buyer activity has involved Asian investors, particularly for development sites, Mr Laycock said this was still an emerging buyer sector in Adelaide.
However, Mr Laycock told the audience that his team was working with their counterparts in Victoria – one of the hottest markets for Asian investment – to encourage investors to broaden their view and consider South Australian opportunities.
At present, Mr Laycock said demand in the sub $10 million investment market was coming from local SMSF’s and high net worth individuals who were predominantly seeking secure investments with long term leases.
“Accordingly, for owners holdings assets that fit this profile, there is an opportunity for some profit taking through marketing assets publicly and taking advantage of existing investor demand,” Mr Laycock said.
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CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2013 revenue). The Company has approximately 44,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 350 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website atwww.cbre.com.au.