Market waiting for main players to make a move

In this week’s look at the real estate industry Tracey Cook ponders the question that has the commercial office market guessing.

THE market is watching and waiting as the multi-million dollar question keeps WA’s commercial office sector guessing – will one of the proposed major office developments in the Perth CBD manage to get off the ground in the near future?

Tenants are estimated to be looking for 60,000 square metres of office space over the next year, including BHP Billiton, which has a hefty space requirement of 7000sq m.

In the short term the market will gain additional space from Woodside’s freeing up of 50,000sq m later in the year, Computer Sciences Corporation’s shift out to Subiaco and Ernst and Young’s release of 5,600sq m when it relocates to its new home.

The trend towards decentralisation is expected to continue as tenants who were lured into the CBD by low rents 10 years ago move out due to increasing rents and car parking difficulties.

Despite the flattened commercial office market, some industry pundits believe the Perth market could not only absorb another 30,000sq m building, but an additional tower would stabilise rents in premium buildings in the future market.

Knight Frank director of assets Ian Edwards said that, after 2003, the market would begin to turn bullish, spurred on by the southern railway link, surrounding residential infill, the opening of the Perth Convention Centre and plans to sink the railway between Perth and Northbridge.

“Once 2003 is over and we are back on an even keel Perth will experience strong economic growth,” he said.

Access Economics recently gave WA a healthy report card for economic growth, predicting growth rates of 7 per cent per annum and revealing positive indicators for the resource sector.

Positive flow-on effects throughout the Perth CBD market are expected due to the resource sector’s ability to take up space quickly during joint venture projects.

Mr Edwards said population growth and economic growth would put pressure on Perth in the medium to long term.

“Perth needs one new tower,” he said. “Over the next two years we will see one come out of the ground.”

Mr Edwards said BHP Billiton certainly would add impetus to any development getting under way.

“There are quite a few developers that would build with a major tenant’s pre-committal,” he said.

With a host of long-term leases currently coming to an end, many tenants are keeping their options open and choosing to take short-term leases that expire around 2006.

Mr Edwards said if a new tower did not go ahead, tenants in premium buildings would find themselves in a weak bargaining position due to the lack of significant space in premium buildings.

According to an office market report by NSC Corporate, one of the largest challenges facing many of Perth’s tenant advocates has been identifying enough contiguous space to attempt to lever a better deal for their tenant client.

Colliers International research manager David Cresp said if a new building did not go ahead there would be far fewer options for tenants once vacancies in premium buildings began to tighten up.

“Vacancy rates may go up across the A and B-grade buildings; it would remain tight in the premium market,” he said.

Refurbishments and expansions currently under construction or in planning throughout the CBD will yield around 18,000sq m of space to A and B-grade markets, he said.

Mr Cresp said rents in premium buildings would remain stable for the next few years, mainly due to the amount of space that would be available in Central Park.

“If a building did go up it would keep bargaining power on the tenants’ side for a longer period of time,” he said.

There was opportunity for a boutique development such as Cape Bouvard’s CTA Building development to go ahead, Mr Cresp said, however the window of opportunity was closing for the major building proposals.

Jones Lang LaSalle associate director John Williams said if a 30,000sq m building eventuated the market would comfortably absorb it over one to three years.

“There are only four premium buildings, they are all full, the vacancy rate is not that high and the outlook for the economy is positive,” he said.

NSC Corporate director Steve Carulli said a 30,000sq m building was now out of the equation and the market would continue to look “skinny” for the next three or four years with more companies looking to city fringe office space.

“We are having something of a market correction; the tenants that were drawn into the CBD 10-12 years ago when the vacancy rate was around 30 per cent are moving back out as the rents increase,” he told WA Business News.

Mr Carulli said the market needed to be trickle fed in the medium term to keep rents stable.