_High economic rents in Adelaide CBD to constrain office supply and underpin strong rent growth

In a new report, the firm has found the development pipeline for office buildings in the city has thinned out as developers find it increasingly difficult to meet feasibility criteria.

The level of new supply additions over the next three years as a percentage of total stock will likely fall to a 30-year low in 2025 at 0.9%, before rising with the new supply expected in 2028. No new buildings are expected to be completed in 2027 or 2029, while just one building – Market Square – is due for completion in 2026 and one – Festival Tower II – expected to be completed in 2028.

The Knight Frank research found the lack of new supply is directly related to a sharp rise in economic rents - the level of rent at which the construction of a new development becomes feasible – since 2021, due to a significant increase in construction costs, interest rates, a softening in yields (and the resulting fall in asset valuations) and elevated incentives.

“Economic rents for a new high A-grade office tower in the Adelaide CBD have risen by 93% since Q1 2021, and now sit at $1,150 per square metre,” said Knight Frank Senior Economist Alistair Read, who authored the report.

“That’s 27% higher than the $900 per square metre forecast level of rent upon construction completion, assuming a building were to begin construction now and be completed in Q4 2028.

“Economic rent growth in Adelaide’s CBD has far outpaced A-grade office rent growth in recent years. While economic rents have nearly doubled over the past five years, over the same period high A-grade market rents have risen by just 23%.

“This wide gap between economic and forecast rents underscores the challenge of achieving financial feasibility for new office developments in the current market environment.

“As a result, the pipeline for new office supply in the CBD has diminished substantially, with only a few developments expected to proceed until the gap narrows around 2030.

“The good news is that after years of upward pressure, Adelaide CBD economic rents are forecast to be near their peak. But it is still a long road back to feasibility, with our forecasts suggesting that starting a new development may not be feasible until 2030. If realised this implies there may not be any new developments delivered until 2033 other than those currently under construction.”

Limited supply will underpin stronger rent performance

The Knight Frank research found the thin supply pipeline in the Adelaide CBD would drive an acceleration in rental growth for high A-grade offices.

Gross effective rents for the best A-grade buildings are forecast to grow at an average rate of 4.9% per annum from Q4 2025 to Q4 2030, well above the 10-year average to Q4 2025 of 2.4% per annum.

Should demand accelerate further than expected, the limited supply pipeline could create strong momentum, driving rental growth even higher.

Knight Frank Head of Capital Markets SA Max Frohlich said improving conditions in the office leasing market will support a broader recovery in Adelaide’s capital markets.

“A tighter leasing market with a clearer outlook for income growth sets the stage for a rebound in Adelaide’s capital markets,” he said.

“Stronger effective rent growth and reduced downtime will likely draw capital back into the city, with improving liquidity helping investors transact more easily and re-enter the market with greater confidence

“We do expect there will be a shift in investor focus towards stabilised assets.

“Investors that have traditionally sought to deploy capital via development will find this challenging in the current environment. As a result, we expect many to shift their focus to acquiring stabilised assets and core plus investments requiring less capital expenditure.”

What does it mean for tenants?

Knight Frank Director of Leasing SA Rory Dyus said tenant mobility in the Adelaide CBD office market would likely slow as occupiers opt to renew existing leases rather than absorb the cost and disruption of moving.

“This stickiness will anchor demand in existing high A-grade stock, and as the supply shortage begins to bite, bargaining power will shift decisively towards landlords. In this environment, leasing incentives are also likely to compress as tenants lose leverage and owners become more confident in holding firm on terms.

“With strong rent growth forecast for Adelaide CBD offices, tenants may look to optimise their leased space to minimise costs.

“This could lead to tenants optimising their office footprint, as well as sustained flexible working from home. It could also lead to increased demand for building owners to create shared spaces as tenants look to reduce their fixed leasing costs and add flexibility.”