- Perth's office market thrives with robust economy, high tenant demand, and rising rents.
- Limited development pipeline and strong tenant demand fuelling growth.
- Vacancy rates in Perth expected to drop further with limited supply forecasted.
Perth’s office market was among the top performers, with its robust resources sector driving high tenant demand and market activity, according to Knight Frank’s latest research.
Healthy absorption levels across the board
The Perth CBD Office Market Report found that Perth’s Central Business District (CBD) experienced high net absorption levels over the past two years; 90,534 square metres (sqm), with 23,950 sqm recorded in the first half of this year.
This equated to 4.9% of total stock, the second highest in the major CBDs over the past two years, just behind Brisbane by 0.1%.
Net absorption July 21 – July 23 by CBD
B-grade properties saw positive absorption over the last two years, at 26,181 sqm. A-grade absorption was strong at 36,539 sqm, unlike other major cities where absorption was primarily focused on premium-grade assets.
Additionally, the Perth CBD’s prime and secondary rents both rose in H1 2023, with largely unchanged incentives.
Prime net face rents grew by 1.5% over the six months to July 2023, averaging $678 per sqm, 5.3% more than over the last 12 months, making Perth one of the fastest-growing markets in Australia.
Offices carried by strong economy and employment prospects
Knight Frank associate director of research and consulting and report author, Dr Theo Connell-Variy, remarked that the enduring positive absorption witnessed in Perth’s CBD was a function of its robust economy and employment growth.
Business confidence and conditions
“Amid economic headwinds nationally, Western Australia is outperforming, benefitting from commodity exports, particularly the increasingly sought-after rare earths and critical minerals, which are vital to renewable energy technologies,” he said.
“The state’s tight labour market, with an unemployment rate of 3.8% in August and a 0.7% increase in the participation rate to 69.3% both augur well for continued office demand in Perth.”
Due to an increased supply volume, the overall vacancy rate increased marginally in H1 by 20 basis points to 15.9%. Premium-grade vacancies contracted to 6.3%, second only to Brisbane.
In contrast to the markets elsewhere in Australia, which were facing swelling sublease vacancies due to downsizing major tenants, sublease vacancies declined in Perth once again, now at 0.5%, a testament to the city’s strong economy and high occupancy rates.
Knight Frank head of office leasing Western Australia (WA) Rick McKenzie said that tenant demand was the highest for premium assets, following the flight to quality trend in other parts of Australia.
“While the premium vacancy rate will increase as a consequence of backfill and further completions, demand here remains the strongest of all grades,” he said.
“This is driven by the growing importance placed on quality of accommodation, precinct amenity and Environmental, Social and Governance (ESG) from larger occupiers.”
Few projects in the pipeline
Considering Perth’s limited development pipeline and heightened project requirements, the report forecasted elevated short-term demand for existing A-grade space.
Supply and withdrawals outlook
The last projects in the 2023 pipeline are Capital Square Tower 3 and Westralia Square 2, which deliver 13,681 sqm and 9,529 sqm of space, respectively.
An additional 32,000 sqm at 9 The Esplanade is set for completion in H1 2025, and following that, development at Lot 4 The Esplanade, which is estimated to provide 60,000 sqm in 2027.
No completions are due in 2024, and it is doubtful that there would be significant supply additions in 2025 or 2026, barring substantial pre-commitments, due to the elevated costs of construction and funding, making projects less viable.
Vacancy rates to dwindle
Given the limited supply, Connell-Variy commented that vacancies in Perth would likely tumble further from 2024 to 2026 and beyond.
“We expect the overall vacancy rate will fall from its current level of 15.9% to around 10% by 2027,” he said.
Net absorption and vacancy rate outlook
“Given sustained tenant demand and a modest supply outlook beyond 2023, prime rents are also expected to continue to rise.
“Perth’s history and ongoing demand suggest that it has the potential to outperform other markets.
“The strength of the premium market in particular positions Perth well relative to other cities, with tight supply driving stronger rental growth, and the recent experience of rapid growth in 2019 illustrates the potential to surprise on the upside.
“Moving forward, the market will be aided by the limited supply pipeline to help reduce vacancy rates.”