The slowdown in the WA economy due to the softening of the resources boom has resulted in downward pressure on the Perth office rental market. There are now many opportunities for tenants to get better terms when negotiating new leases or options.
Although demand for Perth CBD office space is winding down, the WA Chamber of Commerce and Industry is forecasting 4% growth for the WA economy in the each of the next two years. Many analysts (including some with an interest in the Perth commercial market) are forecasting only a cyclical correction to demand and rents rather than a crash.
Perth CBD Rents and Vacancy Rates
At the height of the resources boom in 2012 the average office rental costs in Perth CBD peaked at $896 per square metre. Leases typically run for terms of 3 to 5 years and the rents for premium properties in the Perth CBD remained in the $800 to $1000 per square metre range throughout 2013 and early 2014. However, rents are now easing with some forecasters expecting rents to return to the pre-resources boom levels of 2009.
The higher than expected rents are partially due to a number of organisations upgrading to premium office space because of both higher availability and increasing lease incentives. The trend in the eastern states is for lease incentives such as rental holidays and landlord subsidised fitouts to increase prior to rents falling. Incentives in the Perth CBD may be as high as 30% already with agents and owners now actively marketing incentives.
From 2012 to 2014 Perth CBD office vacancy* has increased significantly from:- 3.3% in January 2012;
- 5.7% in January 2013;
- 9.0% in January 2014;
- 11.8 % in July 2014; to
- Approximately 14% in December 2014.
The 30 year average vacancy rate is 11.4%. Forecasts for the peak vacancy rate in the current market cycle are as high 23%.
Reduced Demand for Perth CBD Office Space
In 2012 the WA Government announced the relocation of the head offices of the commerce and housing departments, the WA Police and another 80,000 square metres of government office space away from the CBD. In accordance with the Government Office Accommodation Master Plan (2012-18), as government office leases expire the departments will be relocated to suburban areas such as Stirling, Fremantle and Murdoch.
There is also a nationwide trend for businesses to move from the CBD to neighbouring suburbs adding to the downward pressure on CBD office rental markets.
In Perth many resource projects are moving from design/construction to the operation/production phase reducing the number of personnel required such as engineers, drafters and support staff.
Increased Perth CBD Office Supply
There are a number of office refurbishment and construction projects in the Perth CBD due for completion in 2015 and 2016 which will add approximately 200,000 square metres of available office space. One of these projects is the refurbishment of 108 St Georges Terrace, formerly known as Bankwest Tower, which is forecast for completion in 2015.
Additionally, both Woodside and Chevron are investigating new premises which, if constructed and occupied, would leave their existing offices available and add significantly to the vacancy rate.
Other than this, the increased supply of Perth CBD office space is forecast to fall after 2016 with only one other major project in the planning stage (for construction in 2018). This is normal for the boom-bust Western Australian economy and the lag associated with planning, gaining approvals and constructing new projects resulting in some projects being completed after demand has started to decline.
Summary
The Perth office rental market is under pressure from the post resources boom decline in demand, organisations leaving the CBD, additional office space becoming available and over-heated rental pricing. This offers the opportunity for businesses to negotiate more favourable rental conditions including lease incentives such as subsidised office fitouts both in the CBD and throughout the remainder of the Perth metropolitan area.
* These figures have been taken from a variety of sources and should be considered an approximation only.