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News release


Adelaide office landlords consider refurbishment in response to tenants’ flight to quality and drive for higher Sustainability ratings

Secondary office buildings currently make up two-thirds of Adelaide’s total CBD office stock, the largest proportion of all major Australian office markets.

​​ADELAIDE, 17 December 2013 – Landlords in Adelaide’s office market are considering the benefits of refurbishment and the potential value to be gained from repositioning a building in the current real estate market. This is occurring in a CBD where currently, secondary office buildings make up two-thirds of total stock – the largest proportion of all major Australian office markets.

According to Jones Lang LaSalle’s latest Pulse Research paper, The Refurbishment Position: Leveraging the Spread, over the past few years, the Adelaide office market has seen a flight to quality, which has resulted in a wider spread between prime and secondary occupancy rates.

This flight to quality has been a common theme in the Adelaide office market, with businesses taking the opportunity to upgrade their accommodation from secondary stock to more efficient, higher-quality prime space. This has come at a time when business confidence has been low, and users are reluctant to make decisions on future space requirements. 

According to the report, as tenant sentiment improves, this shift in demand from secondary to prime space may well increase. 

Jones Lang LaSalle’s Director of Leasing Tom Budarick said tenants are looking for new and refurbished buildings with good sustainability credentials. “Less efficient buildings will become less desirable and hence face higher vacancy rates and lower rents. While the timeline is still unclear, at some stage strong sustainability credentials will shift from a consideration to a requirement.” 

According to Jones Lang LaSalle’s Strategic Analyst – Research and Consulting, Lincoln McEwen, over the past few years, prime and secondary office assets have delivered particularly divergent performance.

“The three key metrics of office performance, vacancy spread; rental spread and yield spread, all offer an indication of the best time for refurbishment. 

“Adelaide’s office vacancy is currently concentrated in its secondary stock, with the flight to quality trend offering a level of protection for prime assets during a period of weaker tenant demand.

“Prime vacancy is currently 8.4%, while the secondary vacancy rate has risen to 15.2%. This spread is well above the historical average, and may in fact be understated by the recent completion of 70 Franklin Street, an A grade building that commenced construction without major tenant commitments. 

“Excluding 70 Franklin Street from the analysis, prime vacancy falls to 5.4%, in line with the 10 year average,” said Mr McEwen. 

“While every building is different, an analysis of these three key metrics suggests that now is a good time for refurbishment. Owners should be considering the future of their asset, with the potential to create value by taking advantage of the greater tenant and investor demand for higher-quality space,” said Mr McEwen. 

Mr Budarick said owners who undertake refurbishment may expect to see an uplift in rental; longer lease terms; and shorter letting-up periods.

“In some cases, we have seen rents increase by as much as 20% after refurbishment,” said Mr Budarick.

According to the report, Adelaide’s investment market has seen demand for prime office stock with strong covenants – demand that has not been mirrored in the secondary market. This has resulted in a 37.5 basis point widening of the yield spread between prime and secondary office buildings, with further compression for prime office stock forecast.