Confidence in Perth’s office leasing market rallies

08 June 2018

Commodity prices rallied throughout 2017, providing a boost to business confidence levels and ultimately office leasing deal volumes in Perth’s prime office sector, according to new research from Savills Australia.

Associate Director for Research & Consultancy, Katy Dean, said industry experts knew the market had reached its trough, especially in the prime segment, which began to see higher levels of net absorption and a decline in vacancy rates in the second half of 2017.

“The vacancy differential between prime and secondary grade stock is now at its highest, and a potential increase in prime supply created by new developments cannot easily counter-balance the demand in the short-term,” she said.

“One of the most telling signs of recovery for us at Savills is the decline in the availability of prime full floors to lease.”

Savills Prime Full Floor Availability Report tracks premium and A Grade buildings on a floor-by-floor basis, identifying whole floors competing for tenants - both now and in the future - including those under construction and refurbishment, along with backfill space created by pre-commitment.

The number of full floors available has decreased from 169 in March 2017 to 148 in March 2018, having peaked at 180 floors in July/August 2016.

“The last time the market saw this level of prime full-floor availability was back in 2013,” Ms Dean said.

“What’s more interesting is the take-up over the past 12 months, with the number of floors available declining by 21 floors since March 2017.

“A take up of 20-plus prime full floors in one year hasn’t been seen since 2011, when the market was reaching the peak of the mining boom.”

Savills Director for Office Leasing, Shelley Ritter, said that while recentralisation trends were apparent in 2017, the “flight to quality” phenomenon was “well and truly in full swing”, as tenants rationalised occupancy costs and upgraded into prime space from within and from outside the CBD.

“The demand for prime space has driven this reduction in vacancy, with premium-grade space being the largest beneficiary of this so far,” she said.

“There are currently only two premium assets that can provide contiguous floor options for a 5,000sq m tenant, and only four premium buildings that can provide options for a 1,000sq m tenant.”

Ms Ritter said a continuation of two-tiered market characteristics was expected, with “premium and A Grade space metrics pulling further away from secondary, particularly in the west and mid-CBD locales.”

Ms Ritter referenced the 40,000sq m of new supply at 240 St Georges Terrace that had been created by Woodside’s relocation to the new Capital Square.

“Almost 40 percent of the Woodside vacancy at 240 St Georges Terrace has already been committed to, with extensive tenant enquiry received due to the high quality of this premium-grade asset,” she said.

Ms Ritter said Dexus was finalising redevelopment plans for 240 St Georges Terrace, including creating a new street entry, outdoor terrace, end-of-trip facilities and gymnasium.

“Together with an improved retail offering, this will certainly raise the bar for premium tenants,” she said.

According to the report, although the market is still favouring tenants, incentives are starting to taper off for premium space, albeit slightly, and in other A Grade buildings where occupancy levels are normalising.

“Tenant enquiry levels have improved and effective rents are likely to increase modestly in the short to medium term,” Ms Ritter said.

“Effective rental growth will also be assisted by limited new supply in the medium term, an upside that bodes well for landlords looking to capitalise on rising activity in the resource sector.”

Savills Perth’s Managing Director, Graham Postma, said Perth remained well-positioned to offer significant growth prospects for investors with a longer-term view.

“Investor appetite for counter-cyclical investment opportunities outside of the eastern seaboard is a theme we’ve been talking about for the past 18 months,” he said.

“While yields are compressing, the spread between Perth and Sydney or Melbourne is still north of 200 basis points, and that is highly attractive to investors operating under a repositioning or counter-cyclical strategy.”

Examples of this trend include Singapore-based investor OKP Land and HSB Holdings’ first foray into the Australian property market, with their acquisition of 6-8 Bennett Street; and Zone Q’s acquisition of office assets at 55 St Georges Terrace and 182 St Georges Terrace following its highly publicised purchase of Westralia Plaza in 2016.

 
 

Key Contacts

Katy Dean

Katy Dean

Associate Director
Research & Consultancy

Savills Sydney

+61 (0) 2 8215 6011

 

Shelley Ritter

Shelley Ritter

Director
Office Leasing

Savills Perth

+61 (0) 8 9488 4187