February 2015 – Perth Fringe Office Review

12 February, 2015 / Vanessa Rader

The Perth office markets have been hit hard by the downturn in the Mining and Agriculture sectors, which has had a knock on affect also on a variety of employment sectors (including Electricity, Gas, Water and Waste services, Professional services etc) resulting in reducing office space requirements.

Perth CBD also is within a supply cycle which will put further pressure on occupancy levels, keeping rents down, incentives up and create greater competition for the Perth Fringe markets.

Investment across the Perth Fringe (including East and West Perth) totalled $22.045 million or just over 5,000sqm, this area level is the highest since the peak of the market in 2007 in terms of volume, and represents a 67.32% increase on last years turnover. Over the past ten years we can see the various movements in this market, strong growth in the 2007 period resulted in the peak capital value of 2008 at $7,378/sqm which represented a 268.68% growth in just two years. Post GFC there was an immediate revision of capital values down to around $5,000/sqm so too did the volume levels reduce, this remained reasonably stable and took another tumble post 2011 where the vacancy levels increased off the back of large completions. With large completions going to be a permanent fixture across the Perth CBD market over the next year, the demand for small space within the Fringe has been encouraging during a period of face rent compression and high incentives. While sheltering from rent increases clearly not the motivation of purchasers, record low interest rates has spurred on domestic investors and SMSF vehicles for owner occupier small businesses. 2014 capital values have actually witnessed minor 2.93% increase to $4,403/sqm, further positive movement in the short term is not anticipated.

Looking to the West Perth market and the key Statistical Divisions (SD) within the Perth CBD to represent East Perth, vacancy rates have shown steady upward momentum since 2012. Currently the West Perth market has 46,117sqm of vacant space representing 10.9% of the market, a discouraging result being the high sub lease rate of 1.8% which is the highest since 2000 and highlights the contraction of space requirements and movements of tenants to cheaper alternative accommodation. The two SD’s which represent East Perth collectively have a vacancy rate of 13.4% (1.6% sublease) with close to 31,000sqm vacant. These rates continue to trend below the Perth CBD total rate of 14.8% (highest since 1996) however raise concerns regarding achievable rentals, incentive levels and flight to quality for existing tenants out of the Fringe market into a CBD market offering competitive leasing packages.

The strong supply additions across the Perth CBD market has come at a time of economic uncertainty for the State. Unemployment is up and GSP results have been revised down which has put pressure on both consumer confidence and business sentiment. Trading conditions have been affected which has put a dampener on existing employments rates, let alone any business expansion plans. Net absorption (being the change in occupied stock) has been down over the past two years with demand not meeting the supply of new stock. This period, both West Perth and the East Perth SD’s have shown a negative change after a surprisingly positive July 2014 result. In West Perth, the six months to January 2015 resulted in –6,539sqm of demand exit the market despite the small 1,419sqm supply addition, while the East Perth (SD 5 & 6) region recorded –8,709sqm during a period of no supply additions. Looking ahead, there is no major supply additions forecast for the Fringe region, absorption will need to come from expansion or attracting new tenancies to this location. Given the competitive leasing environment across the CBD and dampened business confidence, a recovery inthis market may still be a few years away.

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