THE attraction of prime-grade assets and a move to larger office spaces during the past 12 months are signs of growing confidence in the CBD office market.
While the pandemic has caused some jitters among developers and landlords, the city’s pipeline of office supply remains strong, with more than 150,000 square metres of new office space expected over the next three years.
Property Council of Australia data for the second half of 2021 shows a 1.8 per cent drop in Perth’s CBD office vacancy rate to 15 per cent, indicating the sector’s resilience during the pandemic.
Though the city’s vacancy levels have improved since last year, Perth still recorded the second highest vacancy rates in Australia and was 3 per cent above the national average.
A preference for high-quality office space among businesses was clear in the latest Property Council office market report, with a 6.7 per cent vacancy rate among premium space compared with 21.2 per cent for B-grade assets.
This compared to 7.1 per cent and 23.3 per cent for premium and B-grade office vacancies, respectively, in the six months to July 2021.
Moves by Jacobs Engineering Group and BDO into the new 24,000sqm Capital Square Tower 2 building, from East Perth and Subiaco respectively, exemplified this propensity among businesses to seek superior fitouts.
Industry experts say the pandemic has exacerbated this flight to quality, as companies encourage their staff to return to the office amid increasing competition for employee talent.
Demand
A withdrawal of assets for refurbishment led to a 22,824sqm reduction in net supply of office space in the 12 months to January 2022.
As a result, office vacancy levels fell from 19.9 per cent in January 2021 to 16.8 per cent in July of that year.
However, in the second half of 2021, an increase of 18,542sqm in net supply in Perth’s CBD office market was coupled with a further drop in vacancy rates.
In the second half of 2021, 25,055sqm were added into Perth’s office stock, while 6,513sqm were withdrawn for refurbishment.
Cygnet West commercial leasing partner Dustin May said the fact vacancy rates continued to decline in this environment was a positive sign for business.
“In the last six months, the dominant factor in vacancy rate coming down was due to growth of businesses or actual absorption of office space,” he said.
“Six months before that, about 75 per cent of vacancy rate was due to withdrawal of stock.
“We added more supply than stock we withdrew yet the vacancy rate still came down as we had such strong take up of office space.”
Property Council of Australia WA division president Sandra Brewer said the reduction in vacancy rates reflected the growth of the state’s economy.
“The sizable decrease in vacancy can be attributed two things: businesses relocating into the city from suburban offices and existing companies expanding to accommodate growth,” she said.
Ms Brewer added that the significant decline in sublease vacancy, dropping 0.4 per cent to 0.9 per cent in the latter part of 2021, suggested there was more business expansion among some big CBD tenancies.
“Employers understand how vital an office environment is for attracting and retaining talent, and so leasing decisions have become so much more than a search for space,” she said.
“While COVID-19 continues to change the way we work, strong leasing demand is a clear indicator that businesses are looking beyond the pandemic and still view the CBD as the heart of commerce and collaboration.”
Brookfield owns close to 180,000sqm of space in Perth, about 10 per cent of the city’s total office footprint.
Brookfield Property regional director property and development Nick Ozich said the property giant’s plans to expand that by about 50,000sqm within the next three years reflected its belief in WA’s growth.
“In the last six months, we’ve continued to see strong tenant demand for new office product, which can respond to requirements of businesses post pandemic,” Mr Ozich told Business News.
“Globally, there’s a trend we’re seeing that tenants are willing to pay a premium for new office buildings, with superior air-conditioning systems, touchless technology and flexible working spaces.
“We’ve seen that play out in One The Esplanade and we’ve continued to attract new tenants to the building and the leasing interest.”
Mr Ozich said supply chain disruptions and labour shortages during COVID-19 had not dented progress on its lot seven development at Elizabeth Quay, also known as One The Esplanade.
“We’re assessing scenarios of impact to our construction contracts once the borders open but we’re not seeing material impacts on the projects at this stage,” he said.
Brookfield is seeking pre-commitments from tenants to build its proposed office towers at lots five and six in Elizabeth Quay, which would add 19,983sqm and 33,903sqm of office space to the market, respectively.
The developer expects to finish Chevron’s new headquarters at lot seven in 2023, adding 55,000sqm of office space to Perth.
Mr Ozich said the company was talking to prospective tenants to fill its planned developments at Elizabeth Quay and two office towers at Bishops See, including its recently approved timber building.
Meanwhile, GDI Property Group is progressing with its $57 million timber office tower in Westralia Square without any pre-commitments from tenants.
The ASX-listed developer’s national head of development, David Ockenden, told a recent Property Council event that the company was bullish about future demand.
“I think the market was very quick to take up what it needed to do to survive,” Mr Ockenden said.
“Our tenants at the moment [are] in good shape to reposition themselves for the future, and they’re looking to expand.”
Investment
Limited capital flowed into Perth’s office market in 2021 as border closures hamstrung investors, JLL Perth’s head of capital markets John Williams explained.
JLL withdrew 45 and 182 St Georges Terrace from the market due to lack of demand.
“For multi-tenanted A- and B-grade offices between 30,000 and 100,000 square metres, a majority of buyers that fall into that description are either from offshore or interstate,” Mr Williams told Business News.
“You really need the borders open to maximise that process and get as many buyers in as possible.”
Mr Williams said the appetite from institutional investors for buildings outside of those parameters, above $100 million, remained strong.
This was shown in the Primewest-Blackrock joint venture acquisition of the AMP building at 140 St Georges Terrace for $260 million in April 2021, ahead of Primewest’s merger with Centuria Capital Group.
Centuria head of office Grant Nichols said the purchase of the 28-storey building reflected the company’s strategy to capture tenant demand in a prime CBD location.
He expects further upward pressure on demand when WA’s borders open.
“Tenant demand is correlated to white-collar employment growth [and] you’re seeing strong job ad numbers and falling unemployment, and I think that will extrapolate out to increased tenant demand,” Mr Nichols said.
JLL WA research director Ronak Bhimjiani estimated white-collar employment in Perth’s CBD would grow by about 1.4 per cent over the next decade, slowing from the current figure of about 2.4 per cent.
He said that growth rate equated to a need for 20,000sqm of new office space each year, which was below industry forecasts of close to 50,000sqm per annum to 2023.
Future trend
Director of independent research firm Y Research, Damian Stone, told Business News the anticipated uptick in supply of office space could put upward pressure on vacancy rates.
“I think the expectation has to be that vacancies will increase significantly into 2023, because we are adding new supply with a low level of pre-commitment into a market that has a high proportion of leases expiring in the next two to three years,” Mr Stone said.
He said it was clear tenants were choosing to occupy larger footprints in buildings, even if a lower volume of staff were committed to being in the office at one time.
According to Mr Stone, Perth’s office market was experiencing a calm before the storm in terms of leasing activity.
“We have outperformed where people thought we would be two or three years ago with the best vacancy rate in a number of years, but 2023 is the next challenge,” he said.
“It is going to be challenging for owners, landlords and tenants, because we are still dealing with so much uncertainty.”
Perth’s net absorption in the six months to January was 47,853sqm, including 1,617sqm for premium assets and 27,902sqm for A-grade space: levels not seen since July 2012.
Hawaiian chief operating officer Richard Kilbane expects demand to remain strong in the next few years as the office market moves into a more balanced phase.
“There is so much demand in the market at the moment I don’t think we’re going to get overbuild issues, but it all depends on the economic climate,” Mr Kilbane said.
He said Hawaiian, with 54,044sqm of office space in the CBD, had six tenants that either had recently expanded or were looking to grow.
“That’s why net absorption is so high … [businesses in] engineering, IT, accounting, professional services, a range of sectors [are looking to grow],” he said.
Mr Kilbane said Perth’s falling tenant vacancy figures did not come as a surprise, given the trends in Hawaiian’s properties.
“We can see within our tenant base people moving; at 235 [St Georges] we are full, Parmelia House is almost full, London House is at that 15 per cent figure,” he said.
Mr Kilbane would not comment on the future of London House in terms of a possible listing for sale.
Colliers International national director of office leasing in WA, Jemma Hutchinson, said office rents, which averaged about $700p/sqm for premium-grade space during the latter part of 2021, were likely to rise in the next 12 months.
“It is time to shift the market and move with the demand,” she said.
“We have seen increased rents across several Perth CBD assets over the last six months and until we see incentives start to decline, which needs to be driven by the market, we will see Perth property owners increase face rents as vacancy tightens and demand remains strong.”
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