Office developments redraw city boundaries

The lure of strong rental returns and WA’s busy resources sector has triggered a number of new boutique office projects at the outer edge of the CBD.

DEVELOPERS have pegged a new frontier for Perth’s CBD as a raft of new office projects mooted for the western edge of the city and the eastern fringe of West Perth redraw the boundaries of the business district.

This concerted push into the precinct bounded by the west end of the city and West Perth reflects the availability of development sites near the CBD as well as the city’s historically strong office leasing market, which has driven rents as high as $650 per square metre for new office accommodation on the edge of the city.

Don’t expect to see any new skyscrapers coming out of the ground, however, as the focus of this spike in office activity is strictly boutique.

All the office projects in this new area, both proposed and under construction, measure between 1,500sqm and 20,000sqm, with most falling between 2,000sqm and 10,000sqm.

It’s the sweet spot for office developments in the current market, according to Colliers International director of office leasing Neil Kidd.

The banks are still looking for pre-lease contracts for at least 50 per cent to fund any new office building, and in many cases it’s as high as 70 per cent.

“When you look at that and the available tenants in Perth, it starts to get difficult to go above 10,000sqm,” Mr Kidd said.

“The sweet spot is 10,000sqm up to about 15,000sqm and above that it gets tough to get a pre-commitment, unless you are specifically targeting one of those big tenants like a Shell or an Aurecon.”

The land parcels in the precinct between Milligan and Havelock streets are ready to develop, and projects such as the City Link and even Raine Square have stretched Perth’s business district, demonstrating that you don’t have to be on St Georges Terrace to be in the city.

Knight Frank state director Ian Edwards said the launch of Raine Square last year marked an important shift as Bankwest broke with a century-old tradition - a move partly responsible for the new projects earmarked for the west end of the city.

“It was the first time a bank has shifted its headquarters off St Georges Terrace and it made people think,” Mr Edwards said.

Among the office buildings currently planned for the west end of the city is Primewest’s 3,500sqm Veil 253 project at 253 St Georges Terrace.

In a show of confidence in the market, Primewest has already called for tenders for this project - a signal the proposal has garnered strong interest from prospective tenants.

The Anglican Church’s $85 million construction of an 11,000sqm office project on the Cloisters Arcade site will provide a new headquarters for international engineering group Aurecon, which has signed a pre-lease agreement for five storeys; construction is expected to be complete by 2014.

The owners of the Old Melbourne are pushing ahead with their office ambitions for the hotel site but it’s understood they are considering a redesign in a bid to secure an anchor tenant.

And Georgiou Group has secured a site on the corner of Murray and Milligan streets, north of the Old Melbourne.

QUBE has started construction on its biggest office project to date at 999 Hay Street without a formal pre-lease agreement.

Also, a syndicate led by Steinepreis Paganin partners Roger Steinepreis and David Paganin is building a 3,000sqm office building at 1006 Hay Street, which is due for completion later this year.

However it’s the eastern end of West Perth where activity could really heat up, but only if all the proposed projects manage to lock down pre-lease contracts, which could be an uphill battle.

Unlike their global peers on the terrace, the mid-cap miners aren’t traditional ‘pre-com-miters’, according to Colliers International’s Mr Kidd.

“It’s much easier for an accounting or legal practice to pre-commit because they can say ‘in five years time we will be 20 per cent bigger’,” Mr Kidd said.

“When you are talking to a mid-cap miner it’s difficult for them to say where they will be in five years’ time.

“A lot of them operate from capital raising to capital raising, so it’s difficult for them to make a pre-commitment.”

However, a number of projects have already secured tenants, including QUBE’s projects at 100 Havelock Street and 1101 Hay Street.

Italian oil and gas contractor Saipem Australia has signed on the dotted line for space in 100 Havelock Street, and three tenants have agreed to take up leases in Binary 1101, including AFG, tax accountants Pascoe Partners, and serviced office group Regus.

“There was a period when tenants vacated West Perth because they couldn’t get the expansion they needed, and a lot of the stock coming in there now is being driven by that need to cater for those large mid caps,” Mr Kidd said.

The strong rental growth and robust outlook for WA’s mining sector has drawn some new players into the market, including the RAC-owned retirement village group St Ives and its office project at 1 Ord Street.

Many of the tenants running the ruler over these projects would prefer to be in the traditional core of the city, but a lack of options and strong rental increases in the past few years has forced them to reassess their options.

Among the tenants understood to be considering new accommodation are engineering group GHD, legal firm Corrs Chambers Westgarth, and Deloitte.

Not all the projects on the drawing board for the west end of the city and the eastern precinct of West Perth will get off the ground, and while the outlook for office rents remains sound, it’s a cautious optimism.

Jones Lang Lasalle WA managing director John Williams warned there were no forecasts beyond moderate rental growth.

“It is a landlord’s market, it’s a 5.5 per cent vacancy rate, equilibrium is probably 7 to 8 per cent so landlords still need to give away a 10 to 15 per cent incentive,” Mr Williams said.

“There’s a bit of choice out there for tenants ... the (suburban) locations are starting to look a bit more attractive from a rent level point of view, Belmont continually crops up and there are some options in Stirling.

“They will continue to take some tenants but other tenants need to be in the city and they will remain.”