What about 'incentives'?

Commercial occupiers in metropolitan Adelaide have had it pretty good for the last five years. Leasing incentives offered to tenants moved rapidly skywards throughout 2013-2016 and have remained at these elevated levels over the last 18 months. In the CBD, average incentives reached historical highs of 37% at the start of 2017 (JLL Research) and industrial incentives have remained stubbornly high at around 20% in the North West and Northern precincts (Savills Research). But are the good times about to end for occupiers in Adelaide? 

There are a number of factors could signal the end of tenant-friendly leasing deals… and it could happen in the next 12 months. 

Business sentiment in South Australia is trending positively. Unemployment, long been the macroeconomic bug bear of the state, has been falling significantly. In the June 2018 ABS labour force data, the seasonally adjusted unemployment rate for South Australia decreased to 5.4%, the lowest level recorded since late 2012 and lower than Victoria (5.6%), Queensland (5.9%) and Western Australia (6.1%).

Industries like defence, technology, 3PL, and agribusiness are driving industrial demand along the areas with easy access to the Northern Connector road infrastructure network. According to JLL’s latest Adelaide industrial market overview, gross take-up reached 89,300sqm in June 2018, the largest quarterly figure recorded since March 2013 – and it’s not just the blue-collar sectors that are trending positively. 

Tenant demand in the Adelaide CBD is also improving. The latest Property Council of Australia (PCA) office market report stated that the office vacancy rate dropped for the third consecutive period down to 14.7 per cent in June 2018, with fringe vacancy also dropping. Annual net absorption for 2017 was 20,900sqm, which is the strongest annual net absorption result since 2008 (JLL Research).

Fundamentally, as occupier demand begins to outpace available suitable accommodation options, leasing negotiations can quickly turn in favour of the landlord. Adelaide isn’t at that point yet. But the future supply pipeline is low in both the industrial and office markets. With the improved demand outlook expected over the next three years, the window for tenants to secure long-term leasing deals on favourable terms may be closing. 

 

Toby Hundertmark