Perth’s office market is showing signs of strengthening.
AT first glance, the most recent CBD office vacancy data does not bode well for Perth.
However, a more detailed reading of the numbers provides a far sunnier outlook.
The city recorded the second highest office vacancy rate in the nation, at 15.6 per cent, after Adelaide at 16.1 per cent, for the six months to December 31.
The Property Council of Australia figures reflect a 0.2 per cent reduction in vacancy rates on the prior corresponding period, showing tenants are taking up more space.
Leasing agents reported high volumes of activity across Perth in the second half of 2022, signalling a further retraction in the amount of available space this year.
Colliers WA chief executive Richard Cash pointed out Perth’s similarities to Brisbane, with the latter city’s vacancy rate dropping one percentage point to 12.9 per cent in the six months to December.
“The Brisbane CBD market saw the largest decline nationally in vacancy, and I think one of the trends we’re going to see … is the similarities between what’s happening in the Western Australia and Queensland markets,” he said.
Perth was one of three cities to show a decline in its vacancy rate for the second half of last year, with Canberra (8.9 per cent), Sydney (11.3 per cent), Melbourne (13.8 per cent) and Adelaide recording increases.
Brookfield’s One The Esplanade reached practical completion last week. Photo: Claire Tyrrell
It’s expected about 81,000 square metres of new supply – via Brookfield’s One The Esplanade (55,000sqm), AAIG’s Capital Square Tower 3 (17,000sqm) and GDI Property Group’s Westralia Square 2 development (9,000sqm) – will be added in the next 12 months.
Given this makes up about 4 per cent of the 1.8 million square metres of office stock, industry experts say this will likely increase vacancy rates in the short term.
However, evidence points to a positive sentiment for office space among tenants.
Net absorption rates in Perth – the difference between the amount of space tenants move into and the space they vacate – continues to be positive, at more than 6,000sqm for the second half of 2022.
This marked the fourth consecutive half of positive absorption in Perth and coincides with a 12-month net absorption of 19,388sqm as of January 2023, Property Council figures show.
Colliers national director office leasing Jemma Hutchinson expects this trend to continue.
“We’re on a road to positive net absorption continuing,” Ms Hutchinson told Business News.
“It is important people don’t think the market is slowing down … refurbished stock that came online towards the back end of last year is going through its cycle of leases now.
“Deals are still being done, [the vacancy rate] is going to continue to decline.”
A strong attraction to quality office assets remains, with premium-grade stock representing the lowest level of vacancy at 6.6 per cent.
Property Council of Australia executive director Sandra Brewer said the flight to quality in office space was accelerating amid a tight labour market.
“We are seeing tenants proactively looking for space that gives their employees a better experience at work,” she said.
“They’re looking for high amenity, a lot of socialisation in the office, shared spaces to build that team vibe.
“It’s all about employee retention, because we are in an extremely tight employment market and as they [tenants] see competitors and rivals move into better space, I think organisations realise they need to match or better their rivals.”
Moves by oil and gas giant Chevron and law firm Herbert Smith Freehills from QV1 to Brookfield’s One the Esplanade tower at Elizabeth Quay reflect the appeal of new builds.
CBRE, which manages the leasing at QV1, is advertising about 37,000sqm for lease in the 43-storey building, or 61.6 per cent of the building’s net lettable area.
Owners AXA Investment Managers - Real Assets and Investa Commercial Property Fund have spent more than $100 million in upgrades to QV1’s floors, lifts, lobby and public areas.
CBRE senior director office services Andrew Denny said there was considerable interest in QV1, with negotiations under way for its soon-to-be vacant floors.
“There will be deals announced shortly, it’s exciting what’s happening in QV1,” Mr Denny told Business News.
Chevron’s lease runs out at the end of 2023, with the company’s staged move into Elizabeth Quay starting next month.
Brookfield’s One The Esplanade was fully leased ahead of its practical completion last week.
The building is one of five Brookfield CBD assets, with Brookfield Place towers 1 and 2, 11 Mounts Bay Road and 235 St Georges Terrace comprising its Perth portfolio.
The global asset manager also bought a 50 per cent stake in the Perth Convention and Exhibition Centre last year and plans to develop the asset with joint venture partner Wyllie Group.
Brookfield regional director, property and developments, Nick Ozich said there was a 98 per cent occupancy rate across the company’s national portfolio.
“Looking at the broader Perth CBD market, the latest vacancy figures don’t appear to show all that much change over the past year, but that probably belies the level of activity and absorption going on,” he said.
“We are certainly seeing tenant sentiment continuing to improve; we had good leasing momentum across the portfolio last year, which we think will continue this year, and a keen appetite for well-located stock.
“There is a clear divide between that and secondary assets in terms of demand.”
As well as the premium and A-grade vacancies remaining relatively tight, availability of B-grade office space contracted in the second half of 2022, from 23.2 per cent to 20.9 per cent.
Ms Hutchinson said this was largely due to tenants relocating from the suburbs to the city.
“Because vacancy has tightened with good quality stock, refurbished B-grade in the CBD is now punching well above its weight,” she said.
Ms Hutchinson said buildings such as 251, 179 St Georges Terrace, 12 to 14 and 28 The Esplanade reflected this trend, drawing tenants from fringe areas last year.
Market shifts
Mr Denny said effective rents – a measure of face rent minus incentives – for premium-grade assets had increased by more than 11 per cent in 2022, indicating strength in the market.
“What we saw last year was some increase in face rents and a reduction in incentives,” he said.
“We expect this growth to continue for the next two years, specifically at the top end of the market.”
As Perth’s largest landlord, with 274,911sqm of commercial assets across Perth, Centuria Capital Group observed about 5 per cent rental growth across its WA portfolio last year.
The group, which merged with WA’s Primewest in 2021, recorded 99.8 per cent occupancy in the WA component of its office real estate investment trust in the 2023 half year.
Leasing deals to Acciona at 45 Francis Street in Northbridge, which took up about 1,600sqm, and insurance group WFI at 46 Colins Street were among the deals that bolstered the company’s office REIT.
Centuria head of office Grant Nichols told Business News that Perth, Brisbane and Canberra stood out among other markets in the past 12 months.
“They have been the three outperforming markets in terms of positive tenant demand, so that has certainly been a benefit to our portfolio; and in those markets, due to tenant demand, we have seen rental growth,” Mr Nichols said.
“The issue in Perth is it has had a sustained period of high vacancy, but what we’re seeing at the moment is better tenant demand [and] better net absorption in Perth than we’re seeing in some other markets, so that should reduce the vacancy rate over time.”
Centuria’s purchase of Allendale Square at 77 St Georges Terrace for $223 million in September, with 50-50 joint venture partner MA Financial, was one of the major transactions in the Perth CBD last year.
A leasing campaign is underway to fill 37,000sqm of space in QV1. Photo: CBRE
The deal preceded Realside and Lendlease’s purchase of 108 St Georges Terrace from Brookfield for $340 million, which industry sources say Centuria also bid on.
The ASX-listed property fund (Centuria) listed 251, 253, 255 and 267 St Georges Terrace for sale in September, but withdrew the offering from the market in late 2022.
JLL head of capital markets John Williams said successive interest rate rises from the middle of last year contributed to a pause in major capital transactions in the office market late last year.
“It’s hard to sell anything right now [and] and I’d go as far to say in December last year it was impossible,” he said.
“In one or two months’ time that’s likely to change again, it’s just a matter of the buyers getting confident of what their cost of debt will be in the medium term.”
Business News understands St Martins Centre, at 44 St Georges Terrace, is under contract to Melbourne’s Quintessential Equity for about $110 million.
It is understood the deal is worth about $180 million, but the $70 million difference is being set aside to replace the aluminium cladding on the towers.
Perron Group, which owns a 50 per cent stake in Central Park with Frasers Property Australia, is replacing the aluminium cladding on that building as part of a multi-million-dollar refurbishment program.
The tower at 152 to 158 St Georges Terrace is close to fully occupied, with just one of its 51 floors vacant.
Perron Group chief executive Adam Irving noted that vacancy rates in Perth CBD office assets had continued to trend downward since they approached 20 per cent during COVID.
“Since the lifting of the COVID-19 pandemic lockdowns, the commercial property sector in the Perth CBD has bounced back considerably and Perron Group … has benefited from this upward trend,” Mr Irving said.
“We believe this is a combination of the significant revival across the market, but also a reflection of the substantial reinvestment in this asset, which began prior to the pandemic.”
Improvements
The nearby Atrium building, at 168 St Georges Terrace, is also undergoing extensive refurbishments, including new end-of-trip facilities and added amenities for its tenants.
Owner Dradgin recently installed an indoor basketball court in the building.
The building is 77 per cent occupied, with tenants including acQuire, Jadestone Energy, Successful Projects, Special Eyes, Castledex and Agencia Property.
Lynn Liang (centre), with acQuire senior accountants Michael Guthrie (left), and Tony Hahm.
Dradgin investment manager Lynn Liang said the company had focused on sustainability when upgrading the building.
“We took a considered approach to the refurbishment of Atrium, placing the wellness of tenants and environmental sustainability at the forefront of all planning,” she said.
The 40-year-old asset was the city’s first building to receive a five-star National Australian Built Environment Rating System rating in 2007.
“Higher-quality spaces and improved amenities are essential for the modern tenant, with businesses investing in inviting and open spaces that encourage their staff to return to the office, we believe this is essential for the future of work,” Ms Liang said.
The growing environmental, social and corporate governance requirements are reflected in several new developments in Perth, including GDI Property Group’s Westralia Square 2 hybrid steel and timber office building.
Charter Hall, which recently revamped its Bankwest Tower asset at Raine Square, noted the groundswell of support for ESG credentials in office assets.
“The big change, which has accelerated [recently] and is absolutely at the forefront is ESG, not only on the investment side in terms of attracting equity … but as an extension for tenants in terms of their own ESG statements to their tenants,” Charter Hall office chief executive Carmel Hourigan said.
“All the way down the value chain, we are seeing this as really critical for us.”
Future
Y Research director Damian Stone noted a continuation of the strong demand for high-quality stock but said the new supply could affect vacancy rates down the track.
“What happens to older, lower-quality buildings is a big issue for Perth in the years ahead,” Mr Stone said.
“Perth has been struggling with issues in secondary stock for nearly a decade, with sections of the CBD having vacancy rates over 30 per cent in secondary stock.
“Redevelopment or repurposing is likely to be uneconomic, given the current conditions in the construction industry, so what can be done to prevent ghost buildings across the city?”
He added that global economic pressures, high inflation and rising interest rates could result in reduced demand for WA’s resources, which underpin the economy and office market.
“The 2023 vacancy rate is likely to be the low point in the current cycle for a number of years ahead as Perth’s office market adjusts to the post-COVID world,” Mr Stone said.
