In forecasting the Perth Office market to 2030, one needs to take a fair reflection of the historical forces that brought us to today, and then project these into the future, taking with it some sense of the forces in the wings that will shape the world. Short answer, this is going to be interesting!
Analysis of the Journey to Date
In the commercial property market, we woke up in 2005 expecting the same market conditions as had existed since the collapse in general market conditions in October 1997. The Perth Office market (including West Perth) had 1.6 million square metres of office stock, with little or no movement from the stubborn 10 percent vacancy rate during this period. Peak office rents were in the early 400’s per square metre per annum for only the best Premium office space – at the time being Central Park, Qv1 and Exchange Tower, all of which were constructed in the early 1990’s following the last boom cycle.
Financial institutions were reluctant to finance any development in the “wild west”, and this held the lid down on any unneeded stock additions. Things just rolled on.
However in Beijing, the Premier Deng Xiaoping (possibly) made a statement in 1992 that was to change the destiny of Perth for the next 20 years. “To get rich is glorious“. This opened the Chinese doors and pushed the largely agrarian socialist economy of 1.3 billion into the 21st century. With unprecedented annual growth rates of between 8% and 10% per annum off a comparatively low GDP per capita (USD 366.92, 1992) meant it would take around ten years of compounded growth to register globally – and in 2003 – this hit Perth.
The newly developed S&P Metals & Mining Index of a basket of core extractive companies recorded an average monthly index value of 1200-1300 from 2001 until 2003, then grew to 5000 by 2008. However, back to 2005, the impact of this increase (from 1200 to 2000 in the XMM) had only just started to impact the Perth Office market, with the first recorded increase in net absorption since 2001. And it continued for four straight years until the brakes were briefly applied by the Global Financial Crisis, and then continued to climb to an “Occupancy” level of over 1.9 million square metres across Perth and West Perth in July 2012.
Although the signs were evident almost 18 months earlier as the XMM, now becoming a significant leading indicator to the Perth Office market fell almost 2000 points from January 2011. The Occupancy as recorded by the Property Council of Australia (being a survey of leased premises with at least some occupancy) overstated the actual employment of personnel in Perth. The largest jump in recorded net absorption (Jan 2012 – July 2012) of over 110,000 square metres was almost “panic buying”. The Australian Bureau of Statistics did not record an increase in Perth CBD employment of more than 5,000 FTE (equating to circa 65,000sqm) – hence when the reality of a downturn in Chinese led demand was finally felt by the property industry in Perth, over 100,000 square metres was dumped on the market (as sublease premises) whilst the commercial office development cycle was still adding 220,000 square metres to the market from 2012 until 2019 to cope with demand that had long disappeared.
So we are now in a position where Perth (including West Perth) has almost 2.2 million square metres of office space, with occupancy of around 1.8 million square metres and a recorded vacancy across both markets of 17.8% (Jun 2019).
Where to now?
The Deloitte Access Economics projection in forward employment in the Perth CBD makes a significant reference to the gradual decline in the influence of the Mining sector as the driver of growth and indicates a trend that will see the Professional, Technical and Specialist services leading annual growth for the period from 2019 to 2029 – adding over 10,000 new roles during this period.
Over the same period, a decline in Mining roles based in the Perth CBD of around 3,000 FTE equivalent roles is anticipated.
Most other key industries will show muted growth over this period, therefore an indicated employment growth of circa 19,000 FTE total is expected from 2019 to 2029. Based upon an average density of 13.5 square metres per annum (see chart below), this would suggest addition of approximately 25,000 sqm per annum in terms of net absorption over this ten year period. With this forecast of the Perth Office market of 250,000 square metres, assuming no additional supply of commercial office stock in Perth and West Perth over this period (think back to the late 1990’s), the expected vacancy rate across Perth and West Perth is anticipated to be circa 10.0%.
So what does this mean for Perth tenants?
The long period of high vacancy will not mean that every building in Perth and West Perth (and there are over 1,400 possible options to choose from) will experience the same vacancy – and advantageous position to negotiate from. The general principles of location and quality will ensure that the properties located in the Western Perth CBD along St Georges Terrace (West of Barrack Street) will always receive the greatest attention, and amongst these – the better quality properties such as 100 St Georges Terrace, 240 St Georges Terrace, Exchange Tower and Central Park are experiencing high levels of occupancy as tenants have sought to “upscale” as vacancies appeared.
The take homes are therefore …