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May 07, 2015 0 comments
The majority of tenants seeking, say, 3,000 to 10,000 square metres of office/warehouse accommodation in Adelaide, are typically a division of a national or international business and the Adelaide operation will often represent no more than 8% to 10% of the overall Australian business.

Therefore, the Adelaide relocation, whilst critical locally, is sometimes not the highest priority for the national business.

The situation is often that the South Australian business is flourishing and the need to expand drives the requirement for new premises. The local Manager will prepare a business case that supports the expansion/relocation and the business will then go about seeking new premises.

The majority of tenants in this category do not necessarily require new purpose built accommodation and will commence their search by contacting agents, searching the internet or looking around a preferred area and enquiring from signboards. In most cases they will look for existing buildings in the first instance, however if it is established that no existing buildings suit they then consider Design and Construct options.

In some cases, tenants building or locational requirements (such as Techport/Supply Park) are quite specific and they will have established a brief which seek proposals from developers / owners / agents based on their particular requirements.

As the majority of industrial development that has occurred in the Adelaide market over the past 10 years has been demand driven, with little speculative construction, the available supply of larger, good quality, modern industrial buildings is very low.

So what happens when a tenant starts looking for new premises?

There are three main components:

  • operational suitability for the business;
  • location; and
  • commercial terms and conditions.

Occasionally you will get tenants just seeking cheap space and they will put up with a building that doesn’t really suit but typically they are not looking long term.

So in most cases when tenants are looking at relocating, the operational suitability of the site and buildings is the priority.

Breaking these main components down further:

  • Operationally Suitable:
  • Size and shape of land and building
  • Site layout and location of building (drive around, hardstand, etc)
  • Suitability of warehouse and office (clearance, roller doors, loading areas, office layout/ amenities, etc)
  • Expansion capacity
  • Services (power, broadband, etc)
  • Access (to the site, area, region, etc)

Location

  • Suitability for existing staff (and access to future employee “pools”)
  • Suitability to clients
  • Suitability to customers
  • Profile
  • Recognised industrial location
  • Proximity to rail, port, airport and CBD

Financial

Is rent and terms commensurate with fair market?

Different tenants will weight the locational and financials differently.

Other factors that tenants will consider:

  • financial capacity and track record of developer (and their builder);
  • certainty (do they own/control the land/buildings);
  • compatibility of Landlord/developer; and
  • risk (zoning/approvals, etc).

Geoffrey Robertson’s Hypothetical follows.

Geoffrey Robertson Hypothetical

Historically Adelaide Industrial rentals have compared favourably, ie been lower, with other states, with the exception of Melbourne which has been reasonably comparable.

The gap between existing building rents and the rents required to make new buildings commercially feasible has increased significantly in recent times.

The challenge faced by new developments at the present time is that with the increase in land prices over the past few years, building costs being where they are and expanding yields, new buildings in Adelaide are consistently pushing up over $100 per square metre, as shown in the “Hypothetical” below.

Land – 20,000m2 ($85/m2 + 5.5%) $1,793,500
Building – 7,000m2 ($700/m2) $4,900,000
Land Cost (2 years interest and holding) $250,000
Consultants (6%) $300,000
Agents Leasing and Sale Fee (15% and 1%) $200,000
$7,443,500
Margin 12% $893,200
$8,326,700
7,000m2 x 100/m2 $700,000
Yield – 8.5% $8,235,000

A similar scenario for a site in the “inner north western” suburbs will deliver a rental more likely to be upwards of $120 to $140 per square metre.

The challenge that this raises for the State Manager when presenting his business case to his National Manager is that if he is coming out of a building of, say, 5,000 square metres and paying $70 per square metre, his rent is going to more than double. Add to that the cost to relocate and the business case is heavily reliant on the South Australian business being able to demonstrate a significant growth story.

As I said earlier, Adelaide’s rents have always competed favourably against the other states. Based on the current trend, we are losing this advantage.

My question is that if you are a business looking for a modern, national distribution centre in 10 years time – what factors would make you consider Adelaide if the rents are not more favourable?