There's a certain irony to commencing construction of a 20-storey office building while surrounded by commercial vacancy signs, but according to the South Australian government, it's good for jobs and investment.

Construction this week began on Cbus Property's $300 million block at 83 Pirie Street, with Infrastructure and Transport Minister Corey Wingard reiterating his department's pledged to become the "anchor tenant" once constructed.

But the recent Property Council of Australia's [PCA] Office Market Report revealed that the CBD's vacancy rate increased from 14.3 per cent to 16 per cent in the six months to January 2021, notably as a result of new space coming onto the market.

"Adelaide needs new commercial office stock to ensure our city modernises with the economy and workplace practices, while also producing sustainable assets for investors and the environment," PCA SA executive director Daniel Gannon said.

The building is being constructed on the site of the former Planet Nightclub, which stood vacant for 16 years, and is surrounded on all sides by numerous "offices for lease" signs.

This includes on Grenfell Street, the site of DIT's current office to be vacated, where one building that was formerly leased by BHP is offering up to 4,000 square metres of office space.

Largest office glut since 2017

The PCA said it was the largest rate of vacancies since 2017 when there was 230,000 square metres of empty office space in the CBD, with about 40 per cent of those buildings being older stock.

It said the glut could also be attributed, although to a far lesser degree, by the COVID-19 pandemic and the subsequent shift to working from home for many staff.

DIT is expected to occupy about 18,500 metres square of the new building, which will offer 30,645 square metres worth of offices, or enough to house 3,000 workers.

According to the state government, it did consider a number alternatives, including existing buildings, but they were not able to accommodate the size required to consolidate the department into one location.

DIT Minister Corey Wingard said the Cbus development was "underpinning construction in the CBD and creating thousands of jobs".

"This move is also saving the taxpayer $56 million by housing all department staff in one building as opposed to multiple locations across the city."

The decision to lease off the plan was overseen in April last year by former DIT minister Stephan Knoll, well before the full effects of the COVID-19 pandemic were clear.

Less than a year earlier, Mr Knoll said the government's ongoing "once-in-a-lifetime reform" of the state's Planning and Design Code would reduce red tape and building code impediments, which he said often made it "cost prohibitive" to upgrade and reactivate existing buildings.

Supply and demand differences

Urban Institute of Australia SA chief executive officer Pat Gerace said there were varying levels of supply and demand for different sizes and quality of office spaces in the CBD and, for those that remained vacant long-term, many could not be easily converted for other uses due to "compliance reasons".

"It may also be there isn't demand for other types of use, like residential and student accommodation ... location and amenity often being major reasons," he said.

"It may also be that it's not economically viable, and a purpose-built new building is better than converting an existing one, but that would vary from site to site."

He said the government, like any other tenant, would consider the quality size and cost of a potential tenancy for its staff.

"The government could also consider other factors like placemaking and heritage, but there is no doubt the rejuvenation of what was a dilapidated site, as well as the jobs created, will be good for the city and state," Mr Gerace said.

Adelaide's competitive edge

Mr Gannon said the city needed to utilise both existing stock and build new stock, claiming Adelaide was the country's most "competitive market for tenants and the most attractive market for prospective landlords".

He said the state's median house price and commercial office rents gave it a competitive advantage nationally, and would hold the state "in good stead when residents and businesses looked to re-establish in a post-COVID world".

"Low office rent and labour costs can lead to deeper investment in businesses and greater long-term investment in workers, both of which contribute to better market metrics in our CBD.

"The more businesses that relocate or start-up in Adelaide, the lower the vacancy rate in time."