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Shortages demand lease reassessment

THE booming Western Australian economy is putting enormous strains on the state’s infrastructure, including the availability of commercial and industrial premises for business tenants. This is adding to pressure for increases in rental costs and business tenants that require more space to expand will find it increasing difficult to find alternative locations. The commercial property construction sector is reacting to the shortage and the sharp increase in demand for space. However, significant new supplies of commercial and industrial property in Perth will not emerge for up to three years, depending on the location and the size of properties required. If you are a business tenant, your capacity to handle this period of property shortage will vary according to your size, expansion plans, lease circumstances and capacity to relocate to a more affordable property. Unprecedented demand for office space plunged the vacancy rate down from 9.5 per cent to 5.8 per cent in the six months to January 1 this year, the lowest ever recorded in the Perth CBD. Almost 100,000 square metres of office space was leased to the market in 2005. The historical average for office space take up in Perth is only 15,000sq m per annum. These figures represent a significant change in the dynamics of the CBD and West Perth office markets. Historically, tenants have had their pick of building, been offered healthy incentives and negotiated low rents. Now, and for the foreseeable future, tenants will struggle to find large amounts of contiguous space in the CBD, and particularly in West Perth. Incentives have almost stopped overnight and rental growth is likely to underpin future development. Major drivers in the marketplace continue to be resources companies and the service providers to the resources industry. Other active sectors in the market are information technology, finance and property services. The vacancy rate in Perth’s other main commercial office market, West Perth, has also hit a record low of 3.7 per cent. The lack of future supply is becoming a major problem. The only new building was the RAC building in West Perth, which was fully leased by the RAC. With only the fully leased 7,778sq m Allendale project due to enter the Perth CBD market in 2006, major CBD tenants are unlikely to source further office accommodation until new office developments are completed during the next three years. The shortage of CBD office space will have a ripple effect. Larger CBD office tenants that require additional space will most likely spread their operations across the CBD as smaller tenancies become available. However, the likelihood of finding prime office space in the city is very limited until new supplies emerge. Smaller CBD tenants still have leasing options in the CBD, but rising rental costs will result in relocation considerations, including leasing prospects in fringe CBD locations such as Subiaco, Leederville, Burswood, Herdsman and Belmont. Similar tight rental vacancy rates are also emerging in other sectors of the property market, including the retail/showroom sectors. An increasing number of business tenants are weighing up the option of owner-occupier premises and taking advantage of the attractive sub-leasing opportunities in the tight property market. Other tenants are considering a range of workspace efficiency strategies to make the best use of existing premises. Whichever strategy a business tenant adopts in this era of property shortage, it will pay to start the planning process for future accommodation needs as soon as possible. Typically a business tenant will prepare for future accommodation needs six months prior to a lease renewal. However, in this market it will pay to start the planning process much earlier, even 18 months in advance. If you are facing a lease renewal for your business premises in the next two years, some of the issues to consider include: • the likely rises in future rental costs; • the possibility of relocating to a more affordable location; • better workspace designs to mini-mise the need for larger premises; • the availability of new rental premises in your existing area as the commercial building construction boom takes hold; • the opportunity of splitting your operation to take advantage of available smaller rental premises; and• owner-occupier opportunities in exiting premises for sale or new developments. The good news is that a commercial property construction boom is under way and new supplies of commercial rental properties will emerge. According to the Australian Bureau of Statistics, the total value of non-residential building construction in 2005 was $2.1 billion, which is up by 29 per cent on the previous year. However, the supply of new commercial/industrial property will take time to emerge, so business tenants should plan for their future needs as early as possible.

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