Pressure on suburban offices

Building age has emerged as the biggest factor in office vacancies in Perth’s suburbs, with newer developments struggling to attract tenants as the market gets tougher.

Fresh analysis of suburban markets by Y Research shows the vacancy rate in suburban offices was 14.6 per cent at the end of September, up from 13.3 per cent at the end of March.

The report showed that about 10,000 square metres of space was taken up in the period, which was a stark contrast to the CBD and West Perth office markets, where more than 20,000sqm of space was vacated over the same time period.

The biggest deal over the period was that involving underground mining contractor Byrnecut, which shifted to the 9,000sqm Bravo office building at Perth Airport.

Byrnecut is taking up around 3,500sqm at Bravo, while also sub-leasing an additional 5,500sqm.

Another big deal was JDSI Engineering leasing a full floor at Northbridge office building Workzone.

Other major tenants taking up suburban space were five new education providers, technology companies, medical groups and government agencies.

Y Research chief problem solver Damian Stone said the strength of suburban markets was in the diversity of tenants, with office landlords not as reliant on the resources sector to fill buildings.

“Their exposure to it was from service providers and a number of secondary players, so compared to the city the wind-back has been less,” Mr Stone told Business News.

“But at the same time, in the last six months, Newcrest Mining, Alcoa, Mineral Resources, and Orica all put extra space back on to the market.

“An interesting example is Newcrest; they were in Belmont, in 1,100sqm on Great Eastern Highway, they moved into a 400sqm house on Railway Parade in West Leederville.”

Mr Stone said the determining factor for vacancies was the age of a building – with new buildings losing out against cheaper competition.

In some cases, Mr Stone said, A-grade buildings were available for $250/sqm, and lesser-quality buildings for just $100/sqm.

“In this year, between January and now, there have been just over 40,000 square metres added to the market, and 52 per cent of that is vacant,” he said. “If you look back and say ‘well new buildings take time to fill up’ and have a look at what happened in 2013 and 2014, those buildings that were developed then are still 27 per cent vacant.

“Newer buildings have less scope to meet the market in terms of rent, and what’s driving any absorption is rental affordability.”

But those vacant new buildings have done nothing to stop the development wave.

Nearly 70,000sqm of new space will be added to the market by the end of 2016. In the past six months alone, building started on significant new office projects at 500 Hay Street in Subiaco and 25 Rowe Avenue in Rivervale.

There is also a considerable amount of commercial space coming to market as part of mixed-use apartment developments, primarily in South Perth.

Mr Stone said the recent commencements could well be the last buildings in a record wave of office development in Perth.

“Between 2007 and 2016, office space the equivalent of 16 Brookfield Places will have been completed across metropolitan Perth,” he said. “With the Perth CBD vacancy rate forecast to peak at over 24 per cent next year, owners are increasingly targeting suburban tenants to relocate.

“This pressure, combined with slowing economic drivers, lower market rents and changing work practices, places into question the future of suburban office developments in coming years.

“Expect higher vacancies in 2016 across suburban markets as the CBD office vacancy storm rains down on all markets.”