Tight city leasing market puts spotlight on development sites in the CBD

SPECULATION Chevron could expand its multi-billion dollar investment in Western Australia to include a new city tower has sharpened the focus on the city’s major development sites, including the state government’s landmark waterfront development and the City Link land between Northbridge and the CBD.

The US energy giant, which currently leases close to 70,000 square metres in the city, is understood to be running the ruler over a new city tower to house its WA operation.

And there is even talk it could fund this construction itself.

This wouldn’t be new ground for Chevron, which already owns a number of its office properties in the US, including a 50-storey office tower in international energy capital Houston, which it bought for $340 million last month.

Chevron is not the only city tenant analysing its leasing options after Perth’s second quarter vacancy rate slipped to an Australia-wide low of 5.4 per cent, increasing the upward pressure on rents.

Speculation over Chevron’s plans for its office space in Perth has got analysts wondering which of the handful of city sites the group would opt for if it pressed the button on a new tower.

The waterfront development is thought to be a strong contender but the former Emu Brewery site at the west end of the city could also be an attractive proposition; and there are also options in the City Link project and the 40-hectare Riverside land at the east end of the city.

In addition to these large-scale sites there is also the second stage of Hawaiian’s Bishops See project opposite QV1 and the next stage of the City Square development.

The first stage of City Square includes a 75,000sqm tower, which is primarily leased to resource heavyweight BHP Billiton.

The advantage of the second stage of City Square and Bishops See, both of which have existing development applications, is the speed with which they could be brought to market.

Construction on the City Link land or the Perth foreshore is likely to have much longer lead times, however the profile of these flagship sites could tip the balance in their favour.

Property Council of Australia WA executive director Joe Lenzo warned that city tenants needed to carefully examine their options now to ensure they reaped the rewards of the city’s next major construction cycle.

He said the latest city leasing data showed vacancies had fallen faster than anyone had expected, which was shifting the goalposts in lease negotiations.

“Tenants that are currently renegotiating leases are finding they are on the back foot a bit because space is tight, so rents have moved up and incentives are disappearing very quickly,” Mr Lenzo told WA Business News.

“Tenants either have to make that decision now to commit to their existing space and a bit extra because anything that is likely to come up that’s new is still a fair way off.

“When you look at it from a time clock point of view there is a fair hiatus between the end of this cycle and the beginning of the new one – it’s three to five years at least, so start thinking about it now.”

In the short term, property analysts are forecasting significant shortfalls in city office accommodation by 2014, favouring developers with the courage to move quickly to meet demand.

Brookfield has already lodged a development application for the second, 16-level premium office tower on its City Square site but at this size it is unlikely to be large enough for a tenant like Chevron.

Analysts suggest Hawaiian could easily revise its plans for the next stage of Bishops See to increase its floor space from the original plan for a 46,000sqm tower.

Knight Frank director asset services Ian Edwards said there was a high level of demand for city office space from the big-ticket resource groups, but finding tenants to anchor new developments was still a challenge.

“There is probably about 200,000sqm of pent-up demand right now but the problem is in order to build a 40,000sqm office tower you need a pre-commitment from a 20,000sqm-25,000sqm tenant to fund the development,” he said.

“And you just can’t find those very large tenants overnight.”

However, Mr Edwards said there were a number of large entities with the balance sheet to build without securing a pre-commitment from a major tenant, and he forecast it would be these projects that capitalised on the current leasing market.

“If someone comes along who is self funding, and there are certain large entities who can do that; it is gutsy but it’s smart,” he said.

“For larger buildings in the current financial market you need to be a self funder in order to have any chance; if you wait around for that magic tenant the self funders will get them anyway because their buildings will already be under construction and they will be able to beat you by a year or two or three.”

The East Perth Redevelopment Authority is expected to launch the sales campaign for the development rights for the Perth City Link within a matter of months.

This vital parcel of land will reconnect the city with Northbridge and is expected to support as much as 220,000sqm of office space.

The site includes the old Entertainment Centre, which Seven Group is demolishing to make way for a mixed-use development on the site.

At the east end of the city, EPRA’s sprawling Riverside project is expected to house as much as 81,000sqm of commercial space with more than 11,000sqm of commercial property earmarked for the site’s landmark Waterbank development.

EPRA has narrowed the field for Waterbank to two potential developers – Lend Lease Development and Frasers Property Australia – in conjunction with Brookfield Multiplex Constructions. It is expected to announce the winning contender in the coming months.

Despite EPRA’s transformative plans for the city, which will hopefully relieve some of the pent-up demand for city office space, Jones Lang LaSalle managing director John Williams said construction costs in Perth remained a major stumbling block.

Despite the high cost of building in Perth, signing up to space in a new building isn’t necessarily the most expensive option for city tenants.

“To trigger new developments you need hardly any space in the market which means the rent levels for existing space go up because there is low vacancy,” Mr Williams said.

“With Bishops See stage one they did deals for about $450/sqm whereas the market rents at the time were $500 to $550, so if you were prepared to make that pre-commitment there was a deal to be done.”