Perth’s CBD office market vacancy is improving, but there’s a growing gap between different market segments, with premium product luring tenants at the expense of lower-grade stock.
Perth’s property players will be breathing slightly easier on news that the CBD office vacancy rate has fallen below 20 per cent for the first time in two years.
The Property Council of Australia’s twice-yearly office market report found the vacancy rate had dropped from 21.1 per cent to 19.8 per cent in the six months to January 2018.
Presenting the results earlier this month at a breakfast event featuring a panel of industry representatives, Colliers International associate director of office leasing Dustin May said there had been a 257 per cent increase in leasing demand from the last quarter of 2016 to Q4 2017.
Although the report showed Perth still has the nation’s second highest office vacancy rate, it also recorded the largest drop in vacancy (1.3 per cent, on par with Melbourne), suggesting the worst may be over for the CBD.
But not all landlords are seeing the upside.
Demand in the second half of 2017 was concentrated in the upper grades, with the vacancy rates for premium and A-grade stock falling, but rising for B- and C-grade offices. D-grade product remained unchanged.
Flight to quality was persistent, with premium stock accounting for 86 per cent (19,075 square metres) of the 22,178 square metres net absorption recorded across the CBD market.
Premium stock has been the top performer of all grades during the past year, with the vacancy rate decreasing by almost 10 percentage points (from 16 per cent in January 2017 to 6.3 per cent currently), whereas B- and D-grade stock have hovered above 30 per cent, and C-grade at about 20 per cent.
There is limited new supply in the pipeline, with a significant proportion of the space created by Woodside’s shift to Capital Square already under negotiation, according to Mr May.
Mr May said it would be some time before the market started to face pressure on secondary stock.
“There’s a little while to run with flight to quality,” he said.
“However, it will start to slow as we see incentives pull back.”
Refurbishments and speculative fitouts were some key trends, Mr May said, with Colliers research revealing more than $250 million had been spent on CBD building upgrades since 2013, with a further $40 million under way.
To close the gap between grades, Mr May said owners of low-quality product needed to follow in the footsteps of landlords that had invested into improving their buildings.
Also speaking at the event, Charter Hall Group regional portfolio manager Miles Rowe said converting buildings into alternative uses was another option, but one that could be expensive depending on the bones of the building.
The Historic Heart of Perth project led by prominent property developer Adrian Fini is also aiming to help reduce vacancy, by revitalising the streetscapes of the city’s east end, where there is an abundance of secondary stock with landscaping and art.
Project manager Sandie Anghie told the panel there were examples of similar initiatives worldwide that had successfully brought depressed areas like this back to life.
