Competition remains strong to secure suburban office tenants
The Metro Office Research and Forecast Report found the State Government was behind most of the new office construction activity (in buildings from 1,000sqm) in Perth’s suburban markets.
The government developments include the 6,535sqm building at 5 Milldale Way, Mirrabooka, the 9,600sqm building at 8 Davidson Terrace in Joondalup and 2 Newman Court in Fremantle, which is due to be finished in 2020 and will be the biggest new addition with approximately 20,000qm of office space.
Colliers International Senior Research Analyst Quyen Quach said in the past two years, 43,115sqm of suburban office space (in buildings from 1,000sqm) had been delivered and 37,140sqm was under construction.
“While the CBD and West Perth markets have benefited from tenants relocating to more central office precincts, suburban office markets are still feeling the effects from lower economic growth in 2018 and low or negative tenant demand,” Mr Quach said.
A recent survey of Subiaco office buildings (from 1,000sqm) found a 17.4 per cent vacancy, the equivalent to 31,950sqm of space compared with the last survey in 2015, when it had a vacancy of 15.1 per cent or 24,425sqm.
Private sector developments in the suburban market in the past two years include 25 Rowe Avenue, Rivervale which is anchored by Bunnings, 5,000sqm in a mixed-use development at 1 Hood Street, Subiaco and SubiXO at 500 Hay Street, which will have 10,325sqm of office space and is reportedly due to be finished this year after a lengthy delay.
Colliers International Office Leasing Executive Harry Mettam said in the suburban market, which was mostly driven by niche tenants, landlords were competing within their own markets and with CBD office buildings offering competitive rates and incentives in B and C-grade stock.
“In response to this competition, a growing number of suburban landlords are recognising the value in upgrading office buildings to avoid long-term vacancies,” Mr Mettam said.
“There has also been a moderate increase in enquiry from the professional services sector in the suburban office market.”
In West Perth, the report found rents and incentives had been relatively stable due to the moderating vacancy rate, however the market remained susceptible to competition from the CBD.
In the March quarter, Colliers International found West Perth A-grade net face rents averaged $367/sqm down from $370/sqm in March 2018, while A-grade incentives ranged from 35 per cent to 40 per cent.
Average B-grade net face rents in West Perth were generally stable at $300/sqm during the March quarter with incentives between 35 per cent and 40 per cent.
Mr Mettam said resource sector tenants seeking short-term project space were driving office demand in West Perth.
“We expect West Perth’s vacancy to continue to fall from January’s vacancy of 14.8 per cent based on limited new supply and the withdrawal of stock,” he said.
The report also found that although the number of major investment sales in suburban Perth and the CBD fringe markets fell to 16 in 2018, down from 19 in 2017, the total value of 2018 transactions was $549 million, more than double the 2017 total due to two of the largest suburban office asset sales on record—WorkZone West ($125.25 million) and the Optima Centre ($125.1 million).
Colliers International Head of Investment Services Wayne Lawrence said the combination of tightening yields and stable rents was attracting domestic and foreign investors to key office assets in Perth’s suburban market.
The most recent West Perth sale, 1101 Hay Street, which sold for $16.6 million in March, changed hands on a yield of 6.5 per cent.