Perth CBD office outlook upbeat

Perth CBD office outlook upbeat

23 June 2017

The Perth CBD office leasing market is set to gradually improve, say researchers from commercial real estate heavyweight Investa Property Group.

Improving economic conditions in WA, a more optimistic outlook for capital growth economic growth, and growing demand for office space are helping the Perth office market to emerge from the most severe cyclical downturn since the early 1990’s.

Net absorption, in particular demand for smaller (sub-1,000 sqm) tenancy space, has driven an early-cycle turnaround in the outlook for Perth CBD leasing market conditions.

In addition to increased demand for office space from tenants looking for smaller floor plates, net absorption has been positive for both the government sector and finance and insurance. The combination of these sources of positive demand for office space have more than offset the continued negative (albeit softer) impact of lower mining sector demand.

Demand for prime office space is leading the upturn, with net absorption increasing at the strongest level since 2012, while net absorption of secondary office space remains weak and has now been falling for 19 consecutive quarters.

Stronger absorption of prime office space reflects a combination of both increased office-based employment and a ‘flight to quality’. Tenants are benefitting from improved business conditions and favourable rental affordability across property grades to upgrade from secondary space to higher quality office alternatives.

This trend has seen the differential in the prime and secondary market vacancy rates (20.0% and 28.6% respectively) blowout to a multi-decade high.

Consequently, rental affordability across Perth CBD office grades are also widening. Prime market effective rents are increasing on lower incentives and more stable face rents, while the secondary market continues to offer rent discounts and higher incentives to attract tenants.

The dispersion between these markets most recently suggests this ‘flight to quality’ theme has some further to run.

In total, net supply over the coming five years is expected to increase by a meagre 105,500 sqm (or a 6% increase in the size of the Perth office market). That is, around one third of the total net supply added over the past five years.

This sparse development pipeline will go some way to supporting a near-term cyclical improvement in Perth CBD office market conditions.