Tenants relocating from the Perth CBD and West Perth occupy less than 20% of suburban office developments completed since 2008
Over the next month, vacancy trends in the Perth CBD will be widely discussed as we approach vacancy rates not seen since the early 1990s.
A significant point of discussion has been the potential for tenants to relocate to the Perth CBD from suburban areas. As Y Research is the only company to compile regular reports on 50 suburbs across Perth, which in total contain over 1.6 million sq m of stock, we have reviewed decentralisation trends since the first resources boom until 2015 for our second thought leadership report entitled “Suburbs not to blame for CBD office pain.”
What we found was that the record wave of office development across Perth’s suburbs, since the onset of the resources boom, has overwhelmingly been occupied by existing suburban tenants, rather than tenants that have relocated from the Perth CBD and West Perth.
Since the first resources boom, Western Australia has added an unprecedented amount of new office development which will peak this year. Between 2008 and the begining of 2015 the amount of office space in metropolitan Perth office markets increased 28.4%. To put this in context, this is the equivalent of building 11.5 Brookfield Place towers (WA’s largest office building at 70,000 sq m net lettable area) at a rate of just under 1.5 towers annually for seven years.
The suburban office boom, which has seen over 400,000 sq m of space added since 2008, has largely been reliant on the growth of existing suburban tenants to fuel new developments rather than attract CBD or West Perth tenants. 81.6% of space in these new developments has been occupied by existing suburban tenants with the balance occupied by a former Perth CBD or West Perth office tenant. The advent of CBD quality space in suburban locations allowed existing suburban tenants to expand from their current premises or upgrade from older stock.
A limited number of private companies and the State Government decentralised from the CBD in the past 7 years. Major private companies which decentralised include Rio Tinto, iiNet, Police and Nurses Credit Union, Australia Post and Computer Associates. The State Government was the largest tenant to relocate, as part of their new Office Accommodation Master Planning, taking space in Herdsman and Cockburn Central. In most cases, relocating tenants outgrew lower grade CBD spaces with suburban buildings offering better quality buildings at a rental discount to the Perth CBD during boom times.
Decentralising tenants would have limited impact on the current and forecast CBD vacancy rate. If all of these tenants stayed in the Perth CBD, the vacancy rate would still be in excess of 10%.
What about the future? What scope is there for tenants to relocate to the CBD?
In the past 12 months, improved availability of office space in the Perth CBD, on favourable terms, has seen a limited number of suburban tenants relocate or announce plans to relocate into the CBD. This trend has been fuelled by suburban tenants outgrowing their current suburban location, such as Navitas in Mount Pleasant.
It is widely expected within the property industry that tenants relocating to the Perth CBD will accelerate in coming months and have a significant impact on lowering vacancies. Suburban markets are largely occupied by companies that have not chosen to occupy space in the Perth CBD. While lower rental costs are a key attraction for tenants, a number of non-price factors such as access to parking, retail amenity and lifestyle trends are becoming increasingly important factors in organisational occupation decisions.
As evident in the plans by Brookfield Multiplex and John Holland to occupy space in new CBD developments, a number of tenants will look to take advantage of the once in a decade deals being offered in the Perth CBD. A majority of Perth suburban tenants, that occupy over 1.6 million sq m, will remain in their current premises, look to upgrade in their existing suburb or move to a nearby location, less than 5km away. As a result, suburbs such as Subiaco, South Perth, Northbridge and East Perth are the most likely to see tenants relocate to the CBD. It is highly unlikely that the amount of relocating tenants will be able to offset the expected vacancy in the Perth CBD.
The major influences on lower CBD and non-CBD vacancy rates will be the growth of existing tenants and the attraction to WA of new tenants, combined with major stock withdrawals. New growth sectors, health, education, technology and the non-profit sector, have been active in the past 12 months. Professional service firms have also occupied space over a similar time frame. These sectors are evolving and growing but replacing the scale of the resources sector can only be replaced by one group of tenants – the resources sector.
Major stock withdrawals will also assist in lowering vacancy rates. Given the low vacancies, many buildings have not been refurbished in over a decade. Even if refurbished, a number of older, smaller buildings are no longer suitable for modern office use. The cost to convert older buildings into apartments, or hotels, is currently un-viable in Perth despite global and national trends towards conversions.
The most likely outcome is the demolition of older buildings, a Perth trend, to facilitate growth in apartment living. Expect in excess of 50,000 sq m to be demolished by the end of the decade across a small number of buildings in Perth’s eastern end.
Whilst the high vacancy rate will attract significant attention, the key issue for stakeholders in the Perth CBD is how long the vacancy rate will remain at elevated levels. Without major stock withdrawals or improved commodity pricing, the vacancy rate in the Perth CBD could remain above 15% into 2017/2018 impacting the next round of office development.
If you would like to find out more about Y Research’s West Australian Suburban Office research or subscribe to the Report for 2015/2016. Please contact me via damian.stone@yresearch.com.au for an order form.