Adaptive reuse or Adaptive reposition for Adelaide

Adelaide 25 July 2023 –  Is the often talked about, but rarely executed, ‘Adaptive Reuse’ the solution to giving Adelaide’s ageing CBD office stock a new lease on life?

The challenge with adaptive re-use as opposed to repurpose lies in the change of use from commercial to the living sectors, be it short stay accommodation, permanent residential, BTR or student accommodation. Simply put, there are significantly different tenant and legislative requirements for office accommodation vs. living accommodation.

Confronted with a significant supply of new commercial towers attracting a significant number of the prestige tenants in the market, owners of the older stock need to rejuvenate, repurpose or redesign their buildings or face obsolescence.

Obsolescence, or lack of relevance, is every older generation building owner’s challenge. Ignoring this risk almost always translates to smaller private tenants, lower rents, high cap ex and, ultimately, diminishing capital values.

The journey down the ‘net carbon zero pathway’ sounds like a given for property owners to future-proof their assets, right? In addition to attracting improved income, updated buildings can insulate themselves against the pending Scope 1 and Scope 2 corporate requirements to achieve Net Zero goals largely due by 2030.

Occupier “flight to quality” has resulted in significantly tighter vacancy in buildings with a 5.5 star NABERs rating or better (7.9%) compared to 16.0% across the Adelaide CBD. Unsurprisingly the trend is consistent nationally with a significant rental gap of over 20% nationally, when comparing the higher NABERS rated stock to the wider market.

Despite Adelaide having Australia’s second oldest office stock, with around 57% of buildings at least 40 years old, many of these older-generation buildings can still compete in the CBD office market. However these buildings will increasingly need to offer competitive rates with quality fit-outs and upgrades.

This has already been established in several Adelaide office buildings that have refocused their energies on the smaller end of the occupier market. These landlords are pumping cap-ex into speculative fit-out office suites and a focus on ESG principles, including reduced energy usage.

Existing towers that have grasped the adaptive repurpose path to success include Pelligra’s 89 Pirie St and Maras Group’s 74 Pirie St - both enjoying low vacancy numbers. With several assets in the queue to be upgraded including 45 Pirie Street and the Quintessential Equity-owned 100 King William and 30 Pirie Street.

In addition to the Pirie St examples, there are excellent opportunities for buildings in the Grenfell and Waymouth precincts to update their office space and capitalise on their shared amenity: easy access to public transport, entertainment and shopping.

Along with a quality workplace, a building’s “precinct” is also essential to future success as it is considered vital in attracting and maintaining an in-office workforce in a flexible working environment.

Additional elements in the adaptive repurpose of buildings include better connectivity and use of cafés in the ground floor plane, upgrade of staff amenities such as end-of-trip and wellness facilities, and flexible office space that allow a company to expand or contract as required via the use of co-working facilities.

Buildings that provide these elements will enjoy an uplift in rentals with leasing incentives integrated into the fit-out costs. Given the robustness of construction, many of the older structures in the Adelaide CBD lend themselves to the installation of turn-key spec suites which smaller scale tenants clearly prefer, with in excess of 83% of all occupier enquiries for space below 1,000 sqm in 2022/3 preferring an existing fitout.

JLL Research has found that a quality refurbishment and spec suite can increase rental by as much as 19% when considering the following CBD building examples

The adaptive reuse rhetoric that continues in some circles as a solution to the Adelaide CBD landscape appears to be based on the premise of an affordable housing ‘silver bullet’ to increase the number of dwellings in the CBD through the conversion of older office stock.

Based on the current trajectory, the CBD will not be redeveloped utilising BTR or traditional apartment development to solve the housing crisis without significant intervention or tax concessions by the Government to incentivise the development community.