Perth’s commercial property sector is reeling from the simultaneous downturn in iron ore and oil and gas, but the WA capital is not alone among global resources hubs.
Perth’s commercial property sector is reeling from the simultaneous downturn in iron ore and oil and gas, but the WA capital is not alone among global resources hubs.
As recently as five years ago, Perth was one of the hardest places in the world to find a CBD office.
It was the height of the resources boom, and office vacancies had plunged to 0.5 per cent, meaning it was difficult to find even a single desk in the thriving city centre.
The demand drove an unprecedented run of activity for commercial developers, culminating in around 300,000 square metres of new space being added to the market since 2012.
But today, following widespread job cuts and downsizing due to worldwide falls in commodity prices, there is more than 400,000sqm of empty space in Perth’s CBD, giving the city the second-highest office vacancy rate among 14 global energy and resources hubs at 22.1 per cent.
The average vacancy across the cities, the subject of a new report by local analytics firm Y Research, was 14.9 per cent.
At 1.8 million square metres, Perth is the third-smallest market of the 14 cities, the other 13 of which are Houston, Edmonton, Pittsburgh, Denver, Calgary, Oslo, Aberdeen, Singapore, Kuala Lumpur, Sao Paulo, Brisbane, Pittsburgh and Cape Town.
Y Research chief problem solver Damian Stone said the rapid decline was due to simultaneous downturns occurring in both the iron ore and oil and gas industries, with the state’s dual-pronged economy, which was previously considered to be a strength, becoming the office market’s Achilles heel.
“The theory was that when one was up, the other would be down and we could leverage the strength of the other industry to protect us from a downturn,” Mr Stone told Business News.
“But what we’ve found, for resources cities, is you can never be big enough and you can never be diverse enough to not feel a downturn in an important sector.”
However, Mr Stone said Perth was not alone in its rising vacancy rate, despite its physical isolation from its global peers.
Of the 14 cities, just Cape Town and Singapore recorded a fall in vacancies from 2014 to 2016.
Mr Stone said he expected that trend to continue into 2017, with only Singapore and Oslo forecast to record vacancies at levels similar to, or lower than, 2016.
“If the downturn is impacting us, it’s got to be impacting other cities,” Mr Stone said.
“When you look at the office sector in particular, it’s a very similar story where all of the markets get caught by demand by resources companies, start building to meet that demand, and keep building until demand falls off.
“But there is a lag with building completions and we’re left with a supply overhang at the end as everybody starts to downsize.
“When you start looking at who has downsized here, while they are downsizing here, they are downsizing their global operations.
“All of those cities get hit by the same companies at the same time.”
Nonetheless, Mr Stone said Perth would have been the worst performing office market among those researched if not for a recent office boom in Sao Paulo, Brazil, which dwarfed the levels of construction activity in Perth.
“As much as we have built, in Brazil, in the last three years, Sao Paulo has built more office space than anywhere else in the world, outside of China,” he said.
“They have built 600,000sqm of office space in the last three years; that’s really what’s made them the standout in terms of vacancy.”
Those cities to have performed well over the past two years, Mr Stone said, were those that had reduced reliance on the resources sector by diversifying their tenant base.
“If you look at things that are growing now in WA, like tourism, aged care, retail trade to an extent, and agriculture, they have a minimal impact on office markets,” he said.
“From a property perspective, where any of that demand shows up is in industrial property.”
Globally, the four industries that are emerging as growth prospects are education, medical, technology and shared workspaces, sectors that are collectively under-represented in Perth, occupying just 6.4 per cent of CBD office space.
“When you look at the world, those are the clear standout industries in cities that have diversified,” Mr Stone said.
“Vancouver is now home to Amazon, Microsoft and Sony Pictures.
“In addition to being home to Nasa and a large aeronautical industry, Houston has diversified its economy by becoming the medical hub of America, with the Texas Medical Centre being the world’s largest medical centre.
“Edmonton is at the forefront of video game development in Canada, while Cape Town is increasingly being referred to as the digital gateway of Africa.
“Nearly 60 per cent of digital startups in South Africa are located in Cape Town.
“These towns have grown due to incentives offered to companies to relocate, such as payroll tax exemptions, as well as strong private and public support structures.”
In Perth, Mr Stone said while the scale of the vacancies meant that only a massive improvement in the resources space would refill the empty space, there needed to be a focus on non-resources exposure.
“A much as we want to say ‘we should get Google or Facebook to come to WA’, it’s unrealistic, those companies operate in global cities,” he said.
“We are a global resources city, but we’re not a Sydney, LA, London-before-Brexit type of city.
“We’re not Silicon Valley, but maybe we can become ‘silica valley’, given our mineral sands deposits just outside the city.
“Things like mining automation, education programs for mining leaders and mining workers, things like satellite mapping, all of those things that the mining industry has really championed over the last couple of years, we need to leverage those to grow our technology industry, education hubs, shared workspaces and medical research.”
