Adelaide CBD – A recipe for resilience

JLL delves into the factors contributing to Adelaide CBD’s COVID-19 resilience

October 14, 2020

The Australian office sector has been impacted by COVID-19. Our Q2 numbers showed that headcount reductions and tenant downsizing had translated into an increase in sublease availability. Sub-lease vacancy spiked to 1.3% from 0.9% in 1Q20 – an increase of 61,100 sqm.

The pandemic has hit all office markets (with the exception of Canberra). However, the impact has been different across the major CBD office markets. Over the first half of 2020, Sydney (-126,000 sqm) and Melbourne (-50,600 sqm) recorded the weakest results, followed by Brisbane (-19,800 sqm) and Perth (-18,300 sqm). The impact on the Adelaide CBD was less pronounced with positive net absorption of 1,400 sqm recorded over the first half of 2020 (Figure 1).

Figure 1: Net Absorption - Capital City CBD Office Markets, COVID-19 Period (1Q20-2Q20) 

Source: JLL Research

South Australia has managed the health crisis well, accounting for only 1.8% of Australia’s total COVID-19 cases, and the economy has re-opened ahead of expectations. Google’s COVID-19 Community Mobility Report also showed that workplace mobility is only 2% below the pre-COVID-19 baseline.

While the Adelaide CBD office market has shown resilience, leasing activity remains below trend and decision-making has become more elongated. However, there are two important factors that act as insulation against external shocks, which other Australian capital city office markets don’t have; 1) the most diverse tenant base in Australia with the largest space users dominated by public sector departments, and 2) the highest proportion of small office space users in all capital CBD office markets.

Adelaide CBD has the highest occupier diversity among all Australian capital city office markets. Using the employment statistics, we measured the proportion of white-collar employees attributed to the top four industries located in an office market. In 2020, the top four white-collar employment sectors in the Adelaide CBD accounted for 58.5% of the total make-up (Figure 2). This is more diverse than Melbourne CBD (62.2%), Brisbane CBD (64.4%), Perth / West Perth (69.3%), Sydney CBD (71.0%), and Canberra (83.1%).

Figure 2: White Collar Employment Composition – Adelaide CBD, 1Q20 

Source: Deloitte Access Economics

Office tenants in the Adelaide CBD generally occupy smaller footprints than users in other capital CBD office markets. Over the past ten years (2010-2019), 62% of all major tenant moves (>1,000 sqm) recorded in the market were below 2,000 sqm. Nationally, across the CBD office markets, occupier activity within this size cohort was 51% over the same period. While the business failure rate in an economic downturn is typically higher for small organisations, the overall vacancy risk is moderated by the Adelaide CBD’s diverse occupier profile.

These two factors provide the Adelaide CBD with a level of insulation against economic downturns. With the most diverse occupier base of all the capital CBD office markets, its exposure to sector-specific external shocks like equity market downturns or falls in resource prices is limited. And in times of broad-based economic downturns, such as the current COVID-19 pandemic, Adelaide’s smaller average user footprint, with inherent challenges for occupiers to offer part-floors or suites to the market on a sub-lease basis, insulates the market from rapid vacancy escalations in times of crisis.