Rents are down and incentives are up as Perth’s office market swings in favour of tenants.
Demand for office accommodation in the Perth CBD has slumped, according to the latest research, with owners of older buildings set to come under even more pressure as a wave of new supply hits the market next year.
The Property Council of Australia WA’s half-yearly look at office markets showed the office vacancy rate in the Perth CBD had increased to 11.8 per cent, up from 9 per cent in January and 6.9 per cent at the same time last year.
The last time vacancies rose to around 12 per cent was January 2004, with empty offices peaking in January 2005 at 13.4 per cent.
The historical high for office vacancies, according to the Property Council, was 31.8 per cent, recorded in January 1994.
In the latest Office Market Report, premium office stock was still tight, with a vacancy rate of 3.9 per cent, up from 1.4 per cent in January, while vacancies in C-grade stock were around 16 per cent, up from 12 per cent at the start of the year, the Property Council said.
Sublease vacancy, however, stood at 40,000 square metres, more than double the historical average.
The Property Council said negative demand in the 12 months to the end of July was 70,626sqm of office stock.
However, research from commercial real estate agency Colliers International put the vacancy rate slightly higher than the Property Council’s, at 14 per cent.
Premium-grade rents, according to Colliers, were averaging $810/sqm, after peaking in 2011-12 at $845/sqm, while A-grade office rents were around $665/sqm on average at June 30, down from $740/sqm in 2011-12.
Colliers International manager of research and urban economics, Michael Knight, said the figures weren’t cause for panic and were instead indicative of the cyclical nature of office markets.
Mr Knight said the Perth CBD office market had been historically tight for an extended period, with premium grade vacancies in 2011-12 reaching zero, and A-grade vacancies falling to 1.4 per cent in that same period.
“Those figures reflected the fact that the Perth CBD market was overwhelmingly dominated by one type of tenant, and that sort of market is ultimately unsustainable,” Mr Knight said.
Colliers International director of office leasing Neil Kidd added that most building owners in Perth were yet to feel any serious pain from the rising vacancy rate.
“At this point rents have held reasonably firm, and in fact are stronger than all other Australian capitals with the exception of Sydney – although incentives on offer in Sydney are considerably higher than in Perth,” Mr Kidd said.
“The tough point for the Perth market will come in the
middle of 2015 and into 2016, when newly constructed stock comes into the market, and at the same time we’ll see a sizeable amount of refurbished product coming on stream.”
Knight Frank national director of office leasing, Greg McAlpine, said the increase in vacancy had driven a lift in incentive levels, which in some cases were exceeding 25 per cent, making conditions ripe for tenants looking to shift their accommodation needs.
“Activity to date has been mostly in the 2,000sqm-plus and sub-400sqm range, and our view is this could change as all size sectors start to consider their leasing options with the level of incentives on the table,” he said.
CBRE senior director of office services, Andrew Denny, agreed the market conditions had firmly swung in favour of tenants.
“The substantial rise in vacancy rate, coupled with new supply entering the market in the next 12 months, means we are currently seeing the best conditions in nine years for tenants in the Perth CBD,” Mr Denny said.
“Over the past six months, transaction levels in the CBD have increased, when compared to 2013, with some of the best leasing opportunities in the sub-lease space already gone.
“These options had high quality fit-outs available at no cost.
“We expect tenants will now increasingly move to clear new office space as the next best leasing option, with the new office buildings being available in the next 12 months.”
