Shift to Net Zero is creating opportunities for agile property investors
JLL Director of Sales and Investments, Capital Markets SA, Jack O’Leary explains the phenomenon arising from the move to Net Zero and how it can benefit investors in Adelaide’s CBD.
Over the past two and a half years, office floor space in the Adelaide CBD has increased by 10 per cent – a massive number when you consider that total office stock in the city totals 1.55 million square metres.
This new office tower stock represents the largest supply wave ever recorded in the Adelaide market. And while this increase in new supply has increased overall vacancy in the city, occupier demand for the new space introduced to market has been very strong.
Of the 139,500 sqm of new office space developed in the Adelaide CBD since the start of 2022, only 15.2 per cent is available, equating to just 21,300 sqm.
Further to this, almost half of this available space is isolated in smaller office developments located outside the core business precinct. What this indicates is that occupiers want modern, efficient, well-located office accommodation and are willing to pay higher rents to be there.
So, what does this occupier appetite for efficient office space mean for the CBD?
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There are over 50 office buildings in Adelaide CBD of over 10,000 sqm, and almost 80 per cent of those assets are over 15 years old. More worryingly, two-thirds are over 30 years old. Without action, these large, ageing office assets are the highest risk for structural vacancy – a phenomenon where buildings become functionally obsolete for use as office accommodation through lack of investment and refurbishment.
Looking forward, occupiers will continue to opportunistically upgrade their office accommodation, which means that buildings offering modern considerations like high sustainability ratings (NABERS, Green Star), personal amenity (ground floor hospitality offerings, gyms), technology (Intuitive building connection, security) and wellness (biophilia, third space, end-of-trip), will out-perform the broader market.
But as Albert Einstein once famously said, “In the midst of every crisis, lies great opportunity”.
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The majority of Adelaide’s office towers of scale (>10,000 sqm) are not likely to be considered ‘modern’ in 2024. Many towers have been neglected from a capital expenditure standpoint to the point where it could be considered uneconomical for current ownership to undertake the major refurbishment necessary to upgrade these ageing assets to a modern standard.
However, agile developers are already opportunistically acquiring older generation prime assets with the aim of redeveloping them into modern office accommodation. Developers like Quintessential are undertaking considerable refurbishment exercises on assets like 30 Pirie Street and 100 King William Street; excitingly, local group Australasian Property Developments and Realside are conducting a similar exercise at 45 Pirie Street.
This cohort of refurbishment activity is now the next supply wave in the Adelaide CBD and this wave could build further as more developers look to capitalise on favourable investment conditions.
Supply-driven back-fill vacancy in many prime grade assets of scale has impacted income levels and current owners may be increasingly considering divestment. Given this, the opportunity to acquire large prime grade buildings in the Adelaide CBD with refurbishment upside is growing, underpinned by the value proposition offered by refurbishment compared to the development of new assets as economic rents for new builds continues to increase on the back of increased constructions costs.
The benefits for investors looking for value-add opportunities in the Adelaide CBD is positive. According to recent JLL analysis, CBD assets nationally with a NABERS 5.5-star rating or above attract 10 per cent higher net face rents, 39 basis points sharper yields and a vacancy rate 2.7 per cent lower than the wider market.
As we move forward to a more sustainable future, the refurbishment of existing office buildings will become more and more important.
With Adelaide’s favourable comparative pricing for office assets of scale (≥10,000 sqm) and a dominant public sector tenancy mix, the opportunity for development and value-add focussed investors to capitalise on this demand for efficient, sustainable office space is immense.
For over 200 years, JLL has helped clients buy, build, occupy, manage and invest in a variety of commercial, industrial, hotel, residential and retail properties. Driven by our purpose to shape the future of real estate for a better world, we help our clients, people and communities SEE A BRIGHTER WAY SM. Learn more at jll.com
