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Key takeaways from the Property Council of Australia’s Office Market Report

On Thursday 2 August, the Property Council of Australia (PCA) released its latest Office Market Report – providing the latest snapshot of the performance of key CBD and CBD fringe office markets around Australia. Cannings Purple Corporate Affairs Director Fran Lawrence moderated the expert panel discussing the latest report for the PCA WA, and provides a wrap on the key takeaways for the Perth property sector.

After a grim few years, the Perth office leasing market is showing signs of shaking off the gloom and finding its feet again.

Just ten years ago, Perth had the lowest office vacancy rate on record – just 0.3 per cent, or effectively zero. Project demands associated with the resources boom saw every available square metre of office space soaked up.

But as the boom came to an end, that project space fell away and vacancy rates headed up again. Between January 2012 and January 2017, the CBD vacancy rate climbed steadily, peaking at 22.5 per cent 18 months ago.

The July 2018 report revealed Perth’s office market was sitting at 19.4 per cent vacancy, marking a marginal improvement on January’s 19.8 per cent figure. According to Knight Frank Associate Director Office Leasing Sallese Wilmot-Barr, who presented the latest results, that figure is likely to see a significant dip by the time January’s report rolls around as a number of recent or in progress leasing deals filter through to the figures.

Other key takeaways from the July 2018 Office Market Report:

  • Total Perth CBD stock – 1,769,065sqm
  • Direct vacancy – 321,055sqm, or 18.1% (down from 18.4% January 2018)
  • Sub-lease vacancy – 21,291sqm, or 1.2% (down from 1.5%)
  • Net absorption 8,581sqm since January, totalling 30,759sqm since July 2017
  • Premium vacancy down from 6.3% to 4.1%, continuing the top end tightening
  • A Grade vacancy down 0.3% to 17.7%
  • B Grade assets continue to account for the lion’s share of vacancies, up 0.5% to 31.6%
  • C and D Grade assets together account for 18.7% of vacant office stock
  • West Perth total vacancy at 15.8%, down from 16.7% in January

It’s not all good news. On a national scale, Perth still has one of the highest office vacancy rates of any major capital – second only to Darwin, at 21.6 per cent. In contrast, Sydney is sitting at 4.6 per cent and Melbourne is even tighter, at 3.6 per cent.

On the flipside, a lack of any new supply on the immediate horizon and the resulting shortage of large chunks of space for a major corporate or government tenant opens up a counter-cyclical opportunity for new development.

So what does all this mean? Chamber of Minerals and Energy Deputy Chief Executive Nicole Roocke, on the panel for the OMR launch, noted that while the resources sector is picking up again we’re not likely to see the same headlong rush for office space that effectively closed out the market in 2008.

Fellow panel members Lee Pinkerton, of Cape Bouvard, and Ellie Schwab, of Dexus, agreed that the flight to quality we’ve seen in recent years has some way to go – which is good news for owners of premium and A Grade assets, but means those with lower-grade assets in their portfolio will continue to feel the pressure as tenants take advantage of still favourable incentives and stable face rents to upgrade premises.

What to do with those lower grade assets remains one of the biggest questions confronting the Perth office market. As noted by final panel member, architect Greg Niziskiotis of Studio NIZ, there’s no easy answer – converting older buildings into other uses such as apartments or hotels isn’t currently a viable option, and investing capital into upgrades and refurbishments to reposition assets means getting the formula right to make your building stand out and pique tenant interest.

With signs pointing to continued downward momentum for vacancy rates in Perth, it’s this aspect of the market that’s likely to be most keenly watched by the Property Council and its members over the coming 12 months.

Download the full July 2018 PCA Office Market Report