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News release


Paradox in the Perth CBD office market: office space in high demand but a higher vacancy rate

More lease pre-commitment deals concluded in the last 12 months than in the preceding 10 years in Perth's CBD

PERTH, 16 September, 2013  – The Perth CBD office market has seen unprecedented levels of pre-commitments from tenants to new office developments. At the same time, the Perth market has slowed and in the last 12 months the office vacancy rate has increased from 4.5 per cent to 7.9 per cent.

John Williams, WA Managing Director of Jones Lang LaSalle said there is a paradox in the Perth CBD market. The major mining companies have embarked on a period of cost reduction driven by fluctuating commodity prices which has ultimately resulted in reduction of office space usage by the mining companies and their consultants.

“But at the same time, nine companies have agreed pre-lease deals totalling 92,000sqm which has triggered the commencement of construction of eight new office buildings”, he said. These are;

There are several other companies currently actively considering alternatives even at the stage of negotiating terms. It is therefore likely the number of pre-lease deals will increase further prior to the end of 2013.
“The companies making these commitments to new office buildings represent a cross section of business sectors, not just mining companies,” Mr Williams said.
“It is also interesting to note the majority have committed to larger areas than they currently occupy. Given the relative cost of office occupancy in the Perth market, these companies clearly have a positive outlook and foresee an increase in business activity,” he said.
As the commitments to new office buildings have all now been finalised, the timing of the completion for these developments will be in 2015/16. This additional supply will be approximately 152,000sqm of office space which represents 9 per cent of the current stock.
“Given the new buildings are 62 per cent pre-leased and, assuming no further pre-commitments are achieved, the maximum amount of vacant new accommodation that will be delivered to the market in 2015 will be approximately 57,000sqm,” Mr Williams said.
The depth of the market of tenants in the CBD is also increasing. Sustained business activity, in any sector, creates wealth which attracts business service firms and there is clear evidence of this in the Perth market. New entrants in the past 12 months have included merchant banks; Goldman Sachs, Credit Suisse and Bain and Co and law firms; Clyde & Co, Squire Sanders, Clifford Chance and Allen and Overy.
Mr Williams said that the level of mining related construction activity in Western Australia between 2010 and 2013 was at unprecedented levels even from a global perspective. Never before has an economy experienced such a concentration of construction expenditure and activity.
“This invariably impacts on costs. Labour, materials, even office accommodation are in high demand, supply is limited and costs increase to unsustainable levels. There follows a period of readjustment where business focus on costs by reducing expenditure,” he said.
The rapid reduction in iron ore pricing in August 2012 appeared to be the trigger for Perth based miners to step back and review their cost base. While ore prices rebounded quickly, management remains focussed on efficiency.
Even if the peak in expenditure on mining projects has passed, it should be noted there remains $177 billion of resource projects currently under construction or committed and a further $120 billion under consideration.
Anna Garvey, Research Analyst for Jones Lang LaSalle in Perth said the WA economy is therefore likely to remain relatively strong. Western Australia has been ranked the best performing state economy in the CommSec State of State Reports in the last two years which, given current and forecast expenditure, is unlikely to change in the near future.
In Jones Long LaSalle’s view, WA is experiencing a sustained level of high activity and from time to time there will be a reduction in that activity to recalibrate costs. 
“We are being told the “mining boom” is over, yet Western Australia based businesses are making long term commitments to new office space, which indicates an expectation of growth. Consequently we believe the rapid increase in CBD vacancy rates over the last 12 months is not likely to be a long term trend,” said Mr Williams. ​