31/08/2011 - 10:58

Hot CBD market drives smaller projects

31/08/2011 - 10:58

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Hot CBD market drives smaller projects

Perth’s pressure-cooker office market is driving the development of a number of smaller projects on the edge of the CBD as city tenants seek space to consolidate their operations and take advantage of the “off-terrace” rents.

Leasing agents have been appointed for office proposals for the Melbourne Hotel site and 999 Hay Street, which are both at the west end of the city and industry analysts suggest pent-up demand for city office space will drive pre-commitments for both these sites by the end of the year.

The Melbourne Hotel site, which is owned by Singaporean company Oakesfield, has a development application for an 11,000-square metre office development that would sit behind the existing hotel.

QUBE Property Group is understood to have lodged a development application for a 10,000sqm office project at 999 Hay Street and Knight Frank and Jones Lang LaSalle have been appointed leasing agents.

Leighton Contractors’ commitment to 21,000sqm in Charter Halls’ WorkZone office development on Pier Street is a prime example of the shift away from central CBD sites and a similar-sized office project has been mooted for the Wilson carpark site at 396 Murray Street.

Head of leasing WA for Jones Lang LaSalle, Nick Van Helden, said Leighton’s agreement to move into the WorkZone development illustrated how the tight city leasing market was driving new, smaller scale projects at the edge of the traditional business district.

“The prevailing market conditions are very conducive to pre-commitments for new projects and we have just seen that with Leighton,” Mr Van Helden said.

“Some of these smaller developments in the fringe of the city will be very attractive to tenants because they won’t command the same sorts of prime St Georges Terrace rents and they will give tenants the opportunity to be in a more boutique-style offering.”

Mr Van Helden said there were a lot of tenants in existing premium or A-grade office space in the heart of the CBD that were paying very high rents who could pre-commit to a new development and avoid costly future rent increases.

Jones Lang LaSalle’s latest research of office rental growth revealed leasing costs in Perth had risen 5 per cent in the second quarter of 2011 compared to increases of just 1.9 per cent in Sydney and 1.4 per cent in Melbourne.

In the Asia-Pacific region, average A-grade rents in Perth rank seventh, behind Hong Kong, Tokyo, Singapore, Mumbai, Shanghai and Beijing and it leads the pack in Australia.

City tenants are already grappling with a shortfall of up to 200,000sqm in the CBD, which has left large tenants seeking large, contiguous floor plates with severely limited options.

This is adding to the pressure on rents but it also means the developers that can secure a tenant quickly or build without a pre-commitment will be able to negotiate the most favourable construction contracts.

Knight Frank director asset services Ian Edwards said with no major new projects on the horizon it was a buyers’ market for building services. “The first few (projects) to get going will get very good deals but the builders will be smiling for the last few,” Mr Edwards said.

“Tenants haven’t quite got to the point of pre-committing yet but they will by the end of the year and I think we will see some pre-commitments by Christmas,” he said.

The other significant development option is the former Entertainment Centre site, which has a proposal for three towers, the first of which is understood to be a 16,000sqm office project.

To get the go-ahead for any of these new boutique developments, the proponents need to secure significant pre-commitments from tenants, which will only occur when rents are high enough to cover construction costs.

Colliers International director of office leasing David Cresp said new buildings needed rents of around $700 to $750/sqm in 2014 and, given that rents in A- grade stock were already up to around $700sqm, they had reached a point that was making new developments viable.

“The good thing, going into anther period of strong demand is that we have got supply options for tenants,” Mr Cresp said.

“When we saw demand really kick up in the last cycle, rents were still far below what it took to make a new development stack up … so it took a long time between the demand kicking off and the supply coming through.

“And hence, we got down to a 0 per cent vacancy rate, which was a bit of a disaster for the market, particularly in terms of tenants and not that positive for landlords. When rents get to unsustainable levels that’s not the preference for landlords either.”

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