Perth CBD office vacancy rate set to go lower

JLL Research is expecting a reduction in the Perth CBD office market vacancy rate based on early evidence in 2Q21.

This is likely to be driven by a combination of increasing leasing activity and withdrawals. The withdrawal of four A-Grade buildings, undergoing refurbishment/redevelopment, totals approximately 40,000 sqm.

1 Mill Street is anticipated to be demolished in the next 4 weeks pending redevelopment, while 905 Hay Street and 26 St Georges Terrace are withdrawn for major refurbishment. 168 St Georges Terrace will also see majority of the floors withdrawn due to refurbishment.

JLL Research expect these withdrawals to reduce the vacancy rate to approximately 18%.

The downward pressure on vacancy will continue given current levels of activity. Nick Van Helden, WA Head of Office Leasing said demand is continuing to improve with JLL’s monthly tenant inspection numbers back to pre-pandemic levels.

“We are seeing a gradual increase in deal flow with tenants taking advantage of the value proposition, quality of stock and demand for centralisation as the CBD continues to attract new tenants from the suburbs.”

Perth’s sub-lease vacancy has also remained relatively stable in comparison to other national CBD office markets. Very few companies having decreased their footprint primarily due to the strength of the WA economy and the way the State has managed the health response.

“We are also seeing high levels of staff back working from the office rather than home”, said Mr. Van Helden.

Ronak Bhimjiani, WA Manager of Strategic Research said JLL Research have further analysed the overall vacancy rate and concluded large amounts of obsolete stock exist in the Perth market.

“We have reviewed all buildings in the CBD and believe that several C & D Grade assets are unlettable in their current condition. Our definition of unlettable is any building with a static vacancy of longer than 36 months. i.e. no leasing deals have been concluded in this time period clearly indicating the tenant market does not regard these assets / space as viable options.

“When these buildings are removed from the vacancy equation, the “real” office CBD vacancy rate is much lower at 15.0%. Most of the unlettable space requires significant capital expenditure and is located in poorer quality secondary buildings, in fringe CBD precincts or strata titled accommodation”, Mr Bhimjiani said.

The vacancy rate spread between prime and secondary grade assets has widened over the last five years. JLL Research data shows a sharp widening of the spread between the two grades, from an average of 2.3 percentage points in 2016, to 11.2 percentage points as at 1Q21.

Mr Van Helden said we will see further divergence between Prime and Secondary vacancy going forward. Owners that offer well located, quality refurbished accommodation and amenity will attract tenants while neglected stock will remain vacant in the long term.