THE majority of industry analysts in Perth have diagnosed a ‘lacklustre’ short-term outlook for commercial office development in the CBD.
It appears that the much-talked about window of opportunity has closed on any large-scale office development, with most industry analysts sceptical that even the new scaled down Hawaiian Management Group plan for the Bishop’s See site will go ahead.
Colliers International research manager David Cresp said that the current market was working against developers.
He said the terms developers were offering to potential tenants were well above market rents and incentives available currently in the market.
While there were opportunities for refurbishment and boutique buildings to go ahead, any large office development was potentially locked out for up to a decade due to the fact that many tenants had signed leases for eight to 10 years, according to Mr Cresp.
“Office development opportunities in the CBD will become more difficult and limited in the next few years,” he told WA Business News.
Opportunities for CBD fringe suburb developments may also be reduced due to the increasingly competitive CBD lease conditions.
Mr Cresp said he expected a tenants’ market to continue for the next two years, but forecast that demand for office space would pick up at the start of next year as office employment increased.
CB Richard Ellis property analyst Andrew Woodley-Page said that, given the office vacancy rate was above 10 per cent, it appeared that demand for office space in Perth CBD had been met and a new large-scale office building would be unlikely.
Mr Woodley-Page speculated that in the current market climate any development to go up on Westralia Square, one of the largest office development sites in the CBD, would be residential.
Property Council executive director Joe Lenzo said he expected the office vacancy rate, currently over 10 per cent, to increase further as Woodside relocated to their new premises.
Mr Lenzo said in the short term the commercial market was flat and there was little likelihood of any significant development going ahead.
However, he said a scaled down Bishop’s See plan was within the market’s scope, and could possibly go ahead given that it had been reduced from 45,000 square metres to two 15,000sq m towers.
Mr Lenzo said he also expected to see more refurbishments throughout the CBD such as Hawaiian Management’s 182 St Georges Terrace.
“I think tenants are requiring a better level of tenancy, more along the lines of smart buildings,” he said.
“The 3.5 per cent vacancy rate in the newer buildings is proof of this.”
A trend towards more mixed-use development can also be expected in the future in the Perth market, following a trend towards mixed-use developments on the east coast. The combination of retail and residential, with retail on the ground floor and residential in the levels above, allows a more intensive use of limited development land.
Mr Lenzo said while mixed-use developments were occurring in the big cities, it would be some time off before it gained market acceptance in Perth.
With the downturn in commercial development, most developers are looking to residential investment, which is expected to continue to perform over the next 12 months.
Mr Woodley-Page said the eastern end of the CBD would become more of a residential precinct as the Gateway Project proceeded, providing opportunities for developers to convert or develop the old building stock in the area to residential.
Sparked by the lack of good development land and a market perception of residential development profits, joint ventures between landowners and developers are becoming more common in the marketplace.
Enamoured by the perceived profit margins of residential development, landowners are choosing to retain ownership of the land and take a percentage of the development profit.
Mr Cresp said there was a perception among landowners that developers made massive profits, and rather than selling a development site outright were choosing to become partners in a development joint venture expecting to get a higher return.
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