Perth CBD Office Market Indicators As at February 2018
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RESEARCH The Perth CBD vacancy rate decreased to 19.8% as at January 2018, the second successive fall since the peak of 22.5% recorded in January of 2017. Demand for space is still primarily The January 2018 vacancy rate has fallen may also lack the same range of building driven by tenants relocating from 1.2 percentage points from the previous facilities and amenities. These buildings fringe or suburban areas, as well July 2017 headline vacancy rate of 21.2% have struggled with longer term as upgrading their space within the CBD. to 19.8%. Perhaps most pertinently, this vacancies and have been reliant on floor was a product of decline in both direct subdivision and speculative fitouts in an and sublease vacancy rates, whereas the attempt to attract smaller tenants. With a lack of new supply, leasing previous positive recording in July 2017 absorption should continue to reduce the vacancy rate for was driven solely by a reduction in Despite the difficulties leasing secondary prime buildings in particular. sublease availability which is not buildings, three B-grade buildings have necessarily a strong indicator of tenant been placed under contract in 2018 in The relative weakness of the demand. The reported sublease vacancy addition to the settled sale of 45 St secondary market has lead to rate of 1.5% is below the 20 year average Georges Terrace. Should these sales be landlords installing speculative of 1.8%, suggesting that demand should confirmed at their reported prices, a fitouts in order to attract smaller be directly absorbed to the benefit of rough 100bps secondary yield spread tenants. property owners in the short-term. will be disclosed after adjusting for specific financial factors (such as Despite the weak leasing market, Net absorption across the total market of vacancy). In comparison, a lack of recent strong transactional activity for 22,178m² has been predominantly to prime transactions provides less of an secondary buildings suggests Premium (+19,075m²) and A-grade indication of current market sentiment. purchasers may have called the (+8,985m²) buildings, with the total bottom of the market. secondary market recording a flat result (- 5,882m²), albeit from lower overall stock. secondary properties are now likely to Sublease Availability have twice the vacancy of their prime % of all stock per six month period counterparts with a reported vacancy rate of 28.8% in comparison to 14.2%. 4.50% 4.00% Whilst prime stock is outperforming 3.50% secondary, the true performance line is 3.00% currently drawn within A-grade buildings, 2.50% which account for 41% of total stock and vary markedly with their offerings. An 2.00% example of success is the Premium- 1.50% grade 240 St Georges Terrace, owned by 1.00% DEXUS, which has achieved significant 0.50% commitment for space that will be 0.00% vacated by Woodside. Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Valuer—WA Jan-98 Follow at @KnightFrankAu In contrast, we are aware of A-grade SUBLEASE AVAILABILITY 20 YEAR AVERAGE buildings in less preferred locations that Perth CBD Office Market Indicators as at February 2018 Vacancy Rate Annual Net Average Net Face Average Average Core Grade Total Stock (m²) (%) Absorption (m²) Rent ($/m²) Incentive (%) Market Yield (%) Prime 1,081,288 14.2 28,060 500—700 45-50 net 6.50—7.50 Secondary 687,777 28.8 -5,882 300—450 45-55 net 7.50—8.50 Total 1,769,065 19.8 22,176 2 PERTH CBD OFFICE MARCH 2018 RESEARCH Capital Square, 98-124 Mounts Bay Rd - 48,484m² [Woodside] 1 AAIG - mid 2018 - 100% committed to Woodside 240 St Georges Tce - 47,300m² 2 Dexus - $165 million refurbishment - Q1 2019 3 480 Hay St - 34,450m² - Seeking Commitment FES Ministerial Body - DA Approved Crn Barrack St & The Esplanade - 70,000m² [Chevron] 1 4 5 Chevron & undisclosed development partner - DA Pending 7 QV2 & QV3, Hay St - 10,916m² & 19,167m² 5 Investa - DA Approved 2 Perth+, Lots 5 & 6 Elizabeth Quay - 15,000m² & 40,000m² 6 Brookfield - Application for DA with MRA & in-principle support from City 239 St Georges Tce (Bishops See Stage 2) - 46,000m²+ 7 Brookfield/Hawaiian - Mooted 30 Beaufort St & surrounds (World Trade Centre proposal) - 75,000m² 8 Nest Investment Holdings - Mooted, subject to an unsolicited bid for adjoining State-owned land 6 4 8 3 Map Source: Knight Frank Office Leasing Under Construction / Completed Significant Vacancy / Refurbishment Dev Approved / Confirmed / Site Works Mooted / Early Feasibility Major tenant precommitment in [brackets] alongside NLA Map Source: Knight Frank Office Leasing 3 Diversification away from down, the 18.0% vacancy rate of A- Perth CBD—Vacancy Rates grade buildings is anticipated to decline resource sector occupiers? throughout 2018, but this will be Grade Jul 17 Jan 18 somewhat constrained by mixed Demand for space is being driven mainly performance within the grade. For those by Government and service-based Premium 11.7% 6.3% tenants with larger requirements and the industries, with approximately 60,000m² A Grade 19.4% 18.0% desire for contiguous space, options are of large format demand recorded by Prime 16.9% 14.2% limited to just a handful of buildings Knight Frank on top of significant deals B Grade 30.8% 31.1% despite the total availability of that have been struck for future C Grade 20.3% 23.1% 153,132m² in prime buildings recorded commencements within currently by the PCA. This may prevent further tenanted space. D Grade^ 31.6% 31.6% decline in effective rents in buildings Secondary 27.8% 28.8% that can offer such characteristics, in Employment statistics released by Totals 21.1% 19.8% comparison to those that offer Deloitte Access Economics as at Q4 ² subdivided or discontiguous space. 2017 suggest the white collar force for Perth and West Perth bottomed out in Both confirmed and prospective tenants Supply implications should June 2017, following the peak recorded are typically relocating from their existing in June 2014. Industries leading with lower grade premises, or from fringe and Chevron vacate QV1 growth over the past 3 years include: suburban locations such as West Perth One major implication for demand Electricity, Gas, Water & Waste Services, (which is particularly apparent) as their trickling down the grades will be Accommodation & Food Services, Infor- existing leases expire. Chevron’s decision upon their current mation Media & Telecommunications, lease expiry at QV1 in December 2023 Education & Training, and Health Care & Divergence within grades for some 32,000m² of space. Chevron Social Assistance; all industries that have own a development site at Elizabeth long been suggested as critical to the The vacancy rate for Premium stock is Quay, however Knight Frank diversification of the WA economy. now just 6.3%, down from 11.7% understands a proposal has been Whilst their growth is positive, their recorded in July 2017, and 16.0% in presented at an alternative site, whilst proportion of the CBD white collar force January 2017. This has reduced the the owners of QV1 will also present a has only increased from 14.4% to 17.7% pressure on landlords of the highest compelling case to stay which may since December 2014, versus an regarded buildings to offer the same incorporate the mooted development of increase from 41% to 47% across 50%+ incentives experienced QV2 and QV3. Should Chevron commit greater Perth over the same period, previously, which is bringing a greater to any newly constructed space, future indicating the City has not attracted as range of A-grade buildings into the vacancy in QV1 will eventually be to the much employment in these areas as may reckoning for tenants seeking high detriment of the lower grade buildings have been hoped. quality space. As this demand trickles as tenants relocate. Net Absorption and White Collar Net Absorption by Grade Vacancy by Grade Employment Premium, A, B, C & D Grade stock (‘000m2) Prime and Secondary grade (%) (‘000m2 and %) per twelve month period 200 12% 60,000 30% 10% 45,000 150 8% 30,000 25% 100 6% 15,000 20% 4% 50 0 2% 15% -15,000 0 0% -30,000 10% -2% -50 -45,000 -4% 5% -60,000 -100 -6% 0% Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-17 Jan-13 Jan-14 Jan-15 Jan-16 Jan-18 Jan-06 Jan-08 Jan-10 Jan-12 Jan-98 Jan-00 Jan-02 Jan-04 Jan-14 Jan-16 Jan-18 PREMIUM A B C D Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Annual Net Absorption '000m² (LHS) Jan-08 PRIME SECONDARY Annual change to White Collar Force % (RHS) 4 PERTH CBD OFFICE MARCH 2018 RESEARCH disclosed as regular asking rates of occupier with part floors occupied, or Face rent stagnant $500/m² plus 45% to 50% incentives. incoming tenants only committing to Improved vacancy recordings have not short lease terms, whereby upon expiry yet transpired to a material change in Secondary properties continue to a new incoming tenant with a larger face rents, however for Premium and struggle with downward pressure on space requirement may have no regard upper-A-grade buildings, the need to face rents as tenants shift to higher using recycled fitout over a portion of provide the same level of incentives has grade buildings. A majority of deals the space. reduced. This signals potential growth in struck are in the range of $350-$450/m² effective rents, albeit modest. Rents have plus incentives of around 50%, however Conversely, a 3 year old fitout should stabilised at approximately $600/m² on we are aware of face rents as low as still be attractive to future smaller average, however rates of $700/m² and $300/m² in C-grade space, creeping tenants which highlights that these above are still being achieved within the closer towards effective levels.