Perth CBD Office Market Indicators As at July 2019
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RESEARCH Refurbished floors returned to the market for lease and delayed commencements for incoming tenants meant the Perth CBD office vacancy rate only reduced Commodity price growth 10 bps to 18.4% in the 6 months to July 2019. moderating, but still sitting at healthy levels Commodity Prices & Occupied Space However 6 months net LHS: Indexed to Jul-99, RHS: ‘0,000sqm absorption of 15,923 square The sustained run of steep price metres indicates demand for improvement in WA’s major commodities space is continuing. appears to be slowing, with short-term 500 1,600 iron ore supply shortages in Brazil 450 1,500 High quality Premium and upper resolving quicker than first expected, and 400 350 A-grade space has attracted the collapse in LNG spot prices putting 1,400 most of this demand, allowing pressure on export contracts in place 300 prime effective rents to grow (where prices are typically determined 250 1,300 9.5% over the past 12 months. 200 based on the price of oil.) 1,200 150 100 Prices falling back to more sustainable 1,100 No new supply is confirmed until 50 levels are unlikely to be the catalyst for 2023 when Chevron will occupy 0 1,000 a new 30 storey tower at any economic or property market Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-18 Jul-19 Jul-05 Jul-11 Jul-17 Elizabeth Quay to be constructed regression, as the more recent rapid Jul-99 by Brookfield. Other mooted increases were viewed as temporary, and Non-rural commodity prices – A$ Perth CBD Occupied Space proposals will likely have a not the sole basis behind the expanding similar horizon should they pipeline of major projects. secure pre-commitment. The short-term boost is still providing Yields have firmed 19 bps YoY, welcome benefits, with above-forecast behind office occupancy levels having and the calendar year could royalty revenue being a major contributor historically moved in step with record the highest transaction to the State budget returning to fiscal commodity prices (see Figure 1). The volume since 2013. surplus in 2018-2019 for the first time in 5 main misalignment occurred due to years and improving the State’s credit periods of <1% vacancy and the inability rating. to bring supply to the market in time. Increased revenue is also allowing the A further indicator to future economic Government to begin chipping away at prospects is the continued growth in approximately $36 billion of net debt, and mineral exploration dollars spent. fund the first round of investment into major new metropolitan rail projects. The June 2019 quarterly recording of $413.1 million reflects the highest level This relationship between commodity value since March 2013, continuing prices and private and public sector unabated growth since the trough of Senior Analyst — Research WA investment drives employment in March 2015 ($183.2 million, +125%) and professional services, and is the rationale highlighting confidence within the sector. Perth CBD Office Market Indicators as at July 2019 Total Stock Vacancy Rate Annual Net Average Net Face Average Average Core Grade (m²) (%) Absorption (m²) Rent ($/m²) Incentive (%) Market Yield (%) Prime 1,118,177 14.8 14,279 550—650 40—45 6.25—7.00 Secondary 657,658 24.4 8,396 370—450 45—55 7.00—7.75 Total 1,775,836 18.4 22,675 2 PERTH CBD OFFICE SEPTEMBER 2019 RESEARCH Net Absorption & Outlook CBD occupancy creeping closer to peak levels 14,279 sqm YoY Prime 10,484 sqm 6 mo The latest PCA recording marks 2½ years of positive absorption into the Perth CBD 8,396 sqm YoY office market (see Figure 2), and 84,766 Secondary 5,439 sqm 6 mo square metres more occupied NLA compared with the trough of July 2015. Source: Knight Frank Research/PCA The ‘flight-to-quality’ is Today’s 1,450,000 sqm of occupied complete, and shaping the space sits higher than January 2012, but market as a result lower than July 2012 when approximately 157,000 sqm of mostly pre-committed Movement of tenants into prime space stock was added to the market, from secondary buildings and non-CBD instigating the beginning of negative locations has slowed as the range of absorption as occupiers consolidated available options diminish, and those accommodation and requirements able to capitalise on softer market lessened. conditions have locked in long terms. The significance of approaching this This demand—thus far to the detriment of This has had a two-fold impact on tenant milestone is that the positive net suburban and fringe markets—will lose demand: absorption has occurred without the momentum as higher quality CBD same volume of project-specific office offerings push back on asking rents and • larger top tier occupiers in the space (essentially short-term demand). incentives, and remaining price- market are forced to explore the competitive offerings present as less possibility of pre-committing to a An element of uncertainty compelling reasons to relocate. new building; and still remains • leasing activity has shifted towards Increased white collar employment will be smaller tenants, to the benefit of well Whilst the economy appears to have required in order to sustain positive net -located and refurbished secondary turned the corner and commodity prices absorption, and this will only occur with buildings. are contributing to resource-sector led improvements to the broader economy. demand, the primary reason for net This trend is represented in Figure 4, absorption over the past two years has As always, the most likely driver to where the contribution of sub-1,500 sqm been tenants returning to the city that economic improvement? Resource enquiries has been trending upwards on were previously priced out during the sector-led private investment. a quarterly basis. peak of the boom. Perth CBD Occupied Floorspace Perth CBD Net Absorption Perth CBD Tenant Rep Enquiry ‘0,000 sqm sqm net absorption per 6 month period by grade sqm, sum of requests per quarter, CBD only 1,600 140 60,000 60,000 120 45,000 1,500 100 50,000 Thousands 30,000 80 1,400 15,000 40,000 60 1,300 40 0 30,000 20 -15,000 1,200 0 20,000 -30,000 -20 1,100 -45,000 10,000 -40 1,000 -60 -60,000 0 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jan-10 Jan-11 Jan-12 Jan-13 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jul-18 Jul-19 Apr-18 Oct-18 Apr-19 Oct-17 Jan-19 RHS: Net Absorption (6 months) Jan-18 PREMIUM A B C D LHS: Occupied Space 0-499 500-999 1000-1499 1500+ 3 The three buildings anticipated to be Vacancy Rate & Outlook A-grade expiries will test the depth of the market available will provide large tranches of space to the market following a period 14.8% Prime GDI Property Group’s announcement of whereby contiguous areas have been +160bps YoY having re-secured WA Police at Westralia letting up well (Figure 6). 24.4% Square for an additional 5 year term has Secondary -450bps YoY removed a major source of uncertainty in Each building also provides a slightly the market, with several other known different style of accommodation that will suitors in the market now set to formally be demarcated by asking rents. Today’s vacancy rates don’t commence leasing campaigns. paint the full picture New development proposals The varied agreements with the State fighting for the same tenants A divergence between space currently Government to retain the Police, secure deemed vacant (unoccupied) by the the Department of Births, Deaths, and The battle for pre-commitments has Property Council versus space actually Marriages, and lose the Department of intensified, with a major tenant that could available for lease (advertised today) has Justice results in a net reduction in underpin the development of a new tower widened over the past 18 months, and in leased space of 11,142 square metres (in currently considering proposals, in particular the past 6 months. addition to other lease expiries). With addition to the outstanding decision from little like-for-like ‘upper’ A-grade WA Police to consolidate sections of their Strong letting up activity has occurred accommodation available by way of workforce into a new building. across numerous buildings that is still yet competition, the building appears to be incorporated within Property strongly positioned to attract tenants. According to the AFR, ConocoPhillips Council figures, providing a distorted have reportedly committed to a new A- view of the market at the present time. Other buildings vying for the WA Police grade building to be constructed at are thought to have included 905 Hay Capital Square, however confirmation Knight Frank’s analysis of the market has Street (leased to Chevron until April may hinge on a potential sale of its north- found that 15.4% of the core CBD (as far 2020), and 168-170 St Georges Terrace west gas interests. east as Victoria Avenue) is currently (leased to the State Government until advertised for lease (see Figure 5, and early-mid 2020). Development proposals prepared for refer to the rear page of this report). both of the above, FMG (delayed—no The former provides modern decision made), ABN Group (committed Comparatively, fringe areas are accommodation at the west end of the to the suburbs), and other confidential struggling, with advertised vacancy in the CBD, whilst the latter will likely require requirements have flushed out a range of ‘East End’ (Victoria Avenue to Hill Street) larger scale refurbishment, but provides development sites, indicating where the elevated at 31%, and Northbridge & functional large floorplates in a central CBD’s future supply is likely to come Stirling Precincts at 17%.