Reshaping Perth's office market

Office vacancies continue to tighten across the CBD but occupancy levels have not rebounded as quickly as expected after the onset of COVID-19, industry experts say.

Some workers’ reluctance to travel to the city was highlighted in a recent Property Advisory and Research Group report, which showed that 5.4 per cent of Perth’s office population was not commuting to the CBD.

The PAR Group data indicated that about 5,299 fewer office workers commuted to Perth on an average day during the second half of this year.

This trend has emerged as people opt to work from home and foot traffic in the suburbs increases.

Liberty Flexible Workspaces chief executive Jamie Vine said the pandemic also resulted in more people looking for quality office spaces outside of the CBD, as a mid-point between working from home and commuting to the city.

The changing patterns of workers from some industries have led to a rethink in CBD office space, he added. 

“We believe there are many people saying they would rather work from home a few days a week, when what they’re actually saying is we don’t want to come into the city for a few days a week,” Mr Vine told Business News.

He said some companies planned to adopt the hub-and-spoke model, where they provide a central hub (often in the CBD) but also additional spokes, or flexible office spaces, their workers could operate from.

These changing work patterns are expected to have long-lasting impacts for Perth’s office market, but CBD office development is continuing apace.

While views differ on how effective the push to bring workers back to the CBD has been, sentiment remains strong in high-quality office space.

Demand pattern

A recent JLL report into tenant perspectives in the market during 2021 shows Perth is tracking in line with national trends, in that companies are favouring premium office space.

The report shows a 28.5 per cent vacancy rate in Perth CBD B-grade office space, compared with 16.1 per cent nationally.

Vacancy rates in Perth A-grade and premium-grade office spaces were 18.5 per cent and 6.2 per cent, respectively, JLL found.

This compared with national rates of 14.1 per cent and 10.2 per cent during 2021. Colliers International WA director office leasing Dustin May said the pandemic had amplified the push towards quality office assets.

“The reason for that is because tenants or businesses are now trying to lure their staff back into the office, and one way of trying to do this is to have a better offering or a better office environment,” he said.

“They’re doing that in a number of ways; they’re looking to upgrade their buildings, to move to buildings with better amenities [or] facilities like wellness centres, gym, yoga, Pilates.

“All those types of things are traditionally offered in premium-quality buildings.”

Mr May said the flight to quality office assets had occurred in Perth during the past five years and was showing no sign of slowing.

 “The fundamentals we’ve seen in the market [are] attractive rents and incentives on offer, so tenants have looked to take advantage of those rent incentives and decide to move to better quality buildings,” he said.

“That’s why premium-grade vacancy has been under 10 per cent over the past five years.”

Trends

Property Council of Australia’s most recent office vacancy figures showed a 16.8 per cent vacancy rate in Perth’s CBD offices as of August this year, after hitting almost 20 per cent in 2020.

The city’s office vacancy rate peaked towards the end of 2016, when it exceeded 24 per cent.

 Mr May said it was expected to drop below 15 per cent next year.

“We have seen organic growth of business, we’ve seen project space reemerge, the emergence of the resources sector and we are seeing a lot of growth, and that’s transferring into white-collar employment and a declining vacancy rate,” he said.

“Other than 2020, where we did have the vacancy rate increase during COVID-19, we’ve continued on that decline, and we are seeing a more rapid decline in the past 12 months.”

A shift to flexible working promoted by COVID-19 has also made an impact in Western Australia’s office sector.

Mr Vine built a 780 square metre flexible office space in Joondalup last month to test the theory there was a desire and a demand to work near home.

“Joondalup is one of the largest communities that’s far enough outside the CBD to test that theory, but it’s also an area that we believed there was demand in pre-COVID for quality, well managed space [of which] there wasn’t much available in Joondalup,” he said.

Mr Vine said the Joondalup experiment was working as planned, and the group should exceed its budgets into next year.

He said the success of the project showed there was high demand for that middle ground of workers wanting to work outside of the CBD but not always at home.

Spacecubed founder Brodie McCulloch, who was the first flexible office provider to enter the Perth market, said there was still a degree of uncertainty around COVID-19 that resulted in workers seeking more flexibility.

“People are wanting to have more flexibility in how they access space,” he said.

“But also their staff are wanting more flexibility where they only want to come in maybe three days a week instead of five.

“We are also seeing a lot of companies that are based outside of the city getting smaller spaces in the city for their staff to work.”

PAR Group researcher Damian Stone said even a small proportion of Perth CBD office workers shunning the commute to the CBD would lead to significant long-term implications for Perth property assets.

“For all CBD office markets, Perth and elsewhere, working from home is likely to see companies eventually reduce their office space requirements,” he said.

“CBD-based retailers, which rely heavily on the daily office workforce, could potentially experience a significant drop in retail spending, all of which could result in higher office and retail vacancy rate.”

Development

A recent Colliers WA report estimated 91,385sqm of CBD office space was being built or undergoing refurbishment, which would be added to the market over the next two to three years.

Elizabeth Quay is set to cater for 10,000 workers, with the addition of Brookfield’s two-tower development including Chevron Tower, and recently announced 54-storey glass tower by Malaysian developer Victor Goh.

Mr Goh’s CA Corporation is also behind Elizabeth Quay’s EQ development and the Capital Square precinct on Saint Georges Terrace, which includes Woodside Petroleum’s headquarters.

Property Council of Australia WA executive director Sandra Brewer said there were tangible signs office leasing activity was improving, as strong economic activity drove demand.

“The idea that workers and businesses are disconnecting with Australian CBDs is overstated,” she said.

“Even in cities that have been hit hard by COVID-19, the benefits of social connection, collaboration, and agglomeration are winning out.

“The findings are clear; the city is still the centre of WA’s economic activity, with the Perth CBD contributing $45 billion to the national economy annually.”

However, Mr May said some developments had been shelved while proponents waited for tenants to commit to occupying buildings.

“There are a lot of developers with development applications in place ready to proceed when they land a tenant,” he said.

“While we’ve still got a relatively high vacancy rate, there is demand from tenants for high-quality buildings.

“If you are a tenant in the market looking for a high-quality asset, there are [still] options available in the market for you.

“Typically, new buildings are premium grade, so that new supply cycle will probably see developments over the next three to five years off the back of tenant demand for such high-quality product.”