Opportunities Amidst Growth
Adelaide’s commercial real estate market in 2024 is marked by steady growth and evolving opportunities. The city’s economy has been resilient, supported by moderate population growth, especially in the rapidly expanding Outer North region.
The industrial sector remains the standout performer due to ongoing demand from transport and warehousing sectors. Furthermore, infrastructure projects like the North-South Corridor promise long-term growth by improving connectivity and attracting industrial tenants.
The local office sector faces high vacancy rates due to recent developments like One Festival Tower. Opportunities for asset repositioning exist in the sector, particularly in secondary grade office spaces, which have higher vacancy rates as tenants seek out higher quality space.
Retail properties in Adelaide, especially those focused on essential goods, continue to perform well. Despite broader economic challenges such as flat retail spending and high construction costs, investor interest remains strong, driven by solid rental growth.
Overall, Adelaide’s commercial real estate market offers promising opportunities. Investors and occupiers can find significant potential across various sectors, supported by infrastructure projects, strong economic fundamentals, and a stable business environment.
Key Market Indicators
Leasing
Economic Outlook
Inflation
In May 2024 the Consumer Price Index (CPI) rose to 4.0% from 3.6% in April, indicating that the battle against inflation is far from over. Essential services such as housing, fuel, electricity, health, education, and financial and insurance services continue to resist pricing controls. A major contributing factor is the record-high population growth, and there is hope that moderating incoming overseas migration will help curb price increases in these areas.
Despite the flat monthly inflation result, it is unlikely that the Reserve Bank of Australia (RBA) will find reason to increase the cash rate, given that price rises for traceable and discretionary goods have significantly moderated from their peaks. However, the cash rate will likely stay at its current peak until the RBA sees clear signs of falling services inflation. Considering the ongoing impact of population growth, this is unlikely to occur until early 2025.
Retail Trade
Retail spending in Australia has seen a slight improvement. In May 2024, turnover rose by 0.6%, driven by early end-of-financial year sales. Despite this, underlying spending remains flat. Notably, clothing, footwear, and personal accessory retailing saw a 1.6% rise, while department stores fell by 0.9%.
Westpac’s consumer confidence data reveals that Australian consumers remain deeply despondent. Although the Treasury predicts that income tax cuts and cost-of-living measures from the budget will boost real disposable income in the 2025 financial year, it’s uncertain if this will lead to increased retail spending. Even if real disposable incomes rise, a weakening labour market and increasing unemployment are likely to keep Australian consumers cautious about overspending. A recovery in consumer confidence is not expected until there are two or three cuts to the cash rate, giving mortgage holders some relief in their monthly budgets.
Business Sentiment
According to NAB’s Business Conditions report, conditions have returned to long-term average levels. Businesses have reported a decline in Trading and Employment Conditions, while profitability conditions remained steady. NAB’s conditions index has been gradually declining since late 2022. Forward orders fell significantly by 6 points to -7 index points, indicating that businesses expect weaker conditions ahead. The largest declines in forward orders were seen in the mining, manufacturing, and construction industries.
Interest Rates
In their latest meeting on June 19, the RBA decided to keep the cash rate on hold at 4.35%. While goods inflation continues to decline at a steady pace, now nearing the target band, services inflation is proving more stubborn. Despite this, the RBA is aware that the cash rate has less impact on services inflation than on goods inflation, so a further increase would likely have little effect on accelerating services inflation.
The upcoming employment figures over the next few months will be crucial in determining any future cash rate decisions. Advocates for further tightening of monetary policy cite persistent services inflation as a reason to increase the cash rate, while opponents point to declining goods inflation and stagnant retail sales as evidence that current monetary policy is sufficiently tight. The Australian Bureau of Statistics (ABS) monthly labour force measures will provide the RBA with essential data to guide their decision in the coming months.
Impact on Commercial Property Market
Subdued economic conditions are slowing investor demand for certain asset types, especially secondary-grade office spaces. However, many Adelaide retail assets that cater to predominantly non-discretionary retail needs are performing well, attracting strong investor demand and experiencing good rental growth. In the office sector, rents are expected to remain flat while business conditions are sluggish. In the industrial sector, reduced consumer demand for discretionary items is leading to lower demand from the transport and warehousing sector, resulting in plateauing rents in some markets.
Employment, Population and Business Conditions Overview
Labour Force
The Adelaide South employment region has experienced notable employment growth over the past year, outperforming the Adelaide North region and defying the broader state trend. Employment growth in Adelaide North was 1.6% over the year to May 2024, double that of Adelaide South. Unemployment rose modestly in Adelaide North by just 0.8%, compared to a 3.2% increase in Adelaide South over the year to March 2024. Overall, the unemployment rate in Adelaide South remains well below both the South Australian (SA) and national averages as of May 2024, indicating relatively robust business conditions in this market.
Source: Jobs & Skills Australia, Labour Market Data Dashboard, Adelaide North & South, May 2024
At the SA4 level, Adelaide North has the highest unemployment rate in the city, though it remains well below pre-COVID levels. All SA4s have recorded modest increases in unemployment rates since the beginning of 2024, reflecting a trend consistent with the rest of the country
Unemployment Rate - Adelaide SA4s
Source: ABS Labour Force, SA4s, April 2024
Largest Employing Industries, Adelaide - North
Source: Jobs & Skills Australia, Labour Market Data Dashboard, May 2024
Largest Employing Industries, Adelaide - South
Source: Jobs & Skills Australia, Labour Market Data
May 2024
Dashboard,
Both the Adelaide North and Adelaide South employment regions have seen a rise in the proportion of employees in the Healthcare and Social Assistance sectors, mirroring a national trend driven by increased NDIS-related employment. While manufacturing remains a significant employer in Adelaide North, its proportion has decreased. Conversely, Adelaide South has a higher representation of professional, scientific, and technical workers.
Population Growth
Adelaide is forecast to record moderate population growth over the next 10 years. PlanSA expects the population to increase by just under 138,000 people over the next 10 years, which represents an increase of 9.4 per cent.
The Outer North sub-region will be by far the biggest beneficiary of this growth, in terms of both numbers and growth rate. The Outer North is expected to record a population increase of almost 39,000 people by 2033, which is a huge 25.5 per cent increase over 10 years.
Almost one third of the total increase in population in Greater Adelaide is expected to occur in the Outer North.
Greater Adelaide Population Growth Forecasts
Source: PlanSA, Population Projections
Business Conditions
Three SA3s in Adelaide rank in the top 5 in Australia in terms of business risk of insolvency. NorwoodPayneham-St Peters and Unley record the lowest risk of business insolvency rates in the country, and Adelaide City (CBD) the fourth lowest in the country. Adelaide CBD insolvency rates are also well below all over CBDs.
CreditorWatch Business Risk Index - Best Ranked Regions in Australia
Source: CreditorWatch
Impact on Commercial Property Market
Despite relatively low rates of population growth, the Adelaide economy is performing well in the context of the overall Australian economy. Tough business conditions are leading to increasing business insolvency rates all around the country, however, the Adelaide CBD and other inner areas present a low insolvency risk to commercial property investors. The Outer North region is likely to see continued growth in the retail and industrial markets to serve the growing population, which clearly outperforms other areas of Adelaide.
Development and Investment Activity
The second half of 2023 saw the completion of One Festival Tower (Walker Corporation) and 185 Pirie Street (Palumbo Development). This resulted in almost 47,000sqm of space added to the Adelaide CBD office market. In fact, over the last two years, roughly 105,000sqm of space has been added to the Adelaide market. Given vacancy rates are now just under 20 per cent, new office supply in the pipeline has reduced dramatically, giving the market some breathing space to absorb current supply.
Adelaide CBD Developments
In terms of transport infrastructure, The North-South Corridor is one of Adelaide’s most important transport. It will be the major route for north and south bound traffic, including freight vehicles, running between Gawler and Old Noarlunga, a distance of 78 kilometres. The Australian and SA Governments are working collaboratively to expand the route by creating a dedicated, non-stop corridor. This road project will have significant implications for future industrial demand, and is already impacting the market through tenant displacements.
Supply and Demand Outlook
Investment Demand
Investment demand for offices is soft, given the high vacancy rates in the sector and soft leasing conditions. In contrast, demand for assets in the industrial and retail sectors remains strong.
In the industrial market, owner occupiers are looking for space predominately in the north area, after several occupiers have been displaced due to the government buying properties along the north/south corridor. In the industrial market, owner occupiers at the moment appear to have more purchasing power, given the expectations of yields amongst investors have increased as the cash rate has.
In the retail sector, leased investments are still in strong demand. In particular, local investors are looking for well located assets with upside potential on rents.
Tenant Demand
Demand from office tenants has been very soft over 2023, which has caused the vacancy rate to rise to nearly 20 per cent, and incentives to climb to circa 35 per cent (gross). Conditions have improved slightly in 2024, interestingly in the lower A Grade and B Grade market as tenants in the market look for value in the $420 - $475 per sqm range.
Demand from industrial tenants is starting to soften, after very strong conditions coming out of Covid 19. The B and C Grade market has seen the most softening, as pricing in this market became quite high as supply was constrained.
The retail sector is still seeing good demand, in particular in some of the better located shopping centres. While consumer spending has softened considerably around the country, non-discretionary retailers are still recording reasonable turnover. In addition, areas with a high proportion of older residents who have limited or no debt are seeing spending levels holding up better than areas with many highly leveraged households.
Supply
Like most markets around the country, supply of new commercial property stock will be low over the next few years, as high construction costs are making many projects unfeasible in the short term. In the industrial sector, developers may be incentivised to speculatively build projects to attract tenants in a market where occupiers are typically looking to move in to a ready made product. The office sector will see a significant slowdown in supply activity until a good proportion of the current vacant space is absorbed.
LJ Hooker Commercial Adelaide adelaide.ljhcommercial.com.au
Ground Floor, 81 Flinders Street
Adelaide SA 5000
Phone (08) 8232 8844
Email commercialadelaide@ljhcommercialadelaide.com.au
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