The adage ‘slow and steady wins the race’ is playing out in Adelaide, with the city’s prime office market expected to deliver risk adjusted returns superior to Australia’s other capitals over the longer term.
This is one of the conclusions from CBRE’s latest Viewpoint: Space, subs and science: is Adelaide becoming Australia’s smart city?
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 outperformed Australia’s other states over the past 20 years and has also outperformed over the past three years.
A similar outlook is likely over the next two decades according to CBRE’s Australian Head of Research Bradley Speers, generated by defence, resources and technology research, development and investment.
This could stop the brain drain from South Australia and support the future performance of the city’s office market.
“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.”
CBRE’s Viewpoint highlights that Adelaide is set to benefit from the creation of smart jobs associated with the state’s submarine and ship building programs and the Australian space agency.
CBRE Office Leasing Senior Director Andrew Bahr noted the take up of space from these groups had well and truly begun, with Adelaide’s “new” Prime market being the early beneficiary.
As part of the Viewpoint, CBRE divided Adelaide’s prime stock into either a new category, for assets built post-2006 or an old category, for 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.”
Mr Speers noted that further improvements were likely to flow form the Adelaide City Deal, which would grow the city’s innovation economy as would initiatives such as Lot Fourteen, which was set to become a hub for research, innovation and entrepreneurialism in technology and the arts.
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.”
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CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2018 revenue). The company has more than 90,000 employees (excluding affiliates) and serves real estate investors and occupiers through more than 480 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.