25/09/2007 - 22:00

CBD office rents up

25/09/2007 - 22:00

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The sharp rise in CBD office rental rates in Perth during the past year is sustainable, according to recent research by Jones Lang LaSalle.

CBD office rents up

The sharp rise in CBD office rental rates in Perth during the past year is sustainable, according to recent research by Jones Lang LaSalle.

The company’s ‘rent affordability indicator’ suggests rental growth in Perth had generally not kept up with profit or economic growth.

It found occupancy costs as a percentage of profits have been steadily declining in Perth over the past 15 years.

Jones Lang LaSalle strategic analyst Andrew Bouhlas said rental growth in most CBD prime office markets had exceeded the inflation rate.

This had been at an average of 4 per cent to 8 per cent, however, depending on the city.

‘‘Nonetheless, they have not generally kept up with profit or economic growth,” Mr Bouhlas told WA Business News.

As at June 2007, the agency determined net average rents in the Perth CBD in premium, A-grade and B-grade buildings were $610/sq m, $470/sq m and $365/sq m respectively, representing rental growth of between 40 per cent and 54 per cent over the past 12 months.

Mr Bouhlas expected net average rents to increase by more than 10 per cent when September quarter data is collated shortly, and that it would continue to rise until new supply comes online in late 2009-10.

Other market players have a less optimistic outlook, however, with recent reviews more than doubling the rents in some CBD offices, prompting concerns the dramatic growth in rental prices could price smaller tenants out of the market.

CB Richard Ellis senior director of office leasing, Andrew Denny, said the growth in rents was staggering and affecting tenants, not just in the CBD, but in West Perth and suburban areas, with small businesses most at risk.

Mr Denny said even those tenants who had signed leases less than two years ago were seeing their rents more than double with market reviews.

“There are two sides to the rent equation; there are those that can afford to pay and those that won’t be able to keep up with the rental levels. It’s those that can’t afford it, typically small business, that are looking to move out of the CBD and into the suburbs,” he said.

Occupying space on the second floor of Council House for the past seven years, law firm Slater & Gordon’s net rent has almost doubled, from $215/sq m, set by the City of Perth in February 2006, to $425/sq m a year.

Slater & Gordon Ltd practice manager Chris Proust said the outcome of the rent review was not unexpected, given the strength of the economy, and the business would just absorb the cost.

“It’s the price of doing business in WA while the economy is going well. We’re fortunate that we can afford it being a large, national company, but smaller tenants out there might not be able to take it so well,” he said.

Savills director of commercial leasing Graham Postma said most tenants would expect rent increases to happen at this point in the market, particularly if they were coming off a low starting rate with no fixed increases.

“Most expect it but you do get the rare tenant who says ‘You’ve got to be kidding me!’ because they haven’t been reading the news,” he said.

While existing office space has typically been more expensive to rent than space in proposed office buildings, the gap is believed to be narrowing. But pre-commitments remain a valuable proposition, according to leasing agents.

“As buildings reach a higher percentage of pre-commitments, the projects are essentially de-risked and owners can afford to be more aggressive and bring them more inline with projected market rents of 2009,” Mr Postma said.

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