Tenant demand in Perth’s CBD office market leads to a return of rental growth

Sustained tenant demand in Perth’s CBD office market has resulted in the highest positive absorption as a percentage of total stock of any capital city CBD over the past two years, as well as rising rents, according to the latest research from Knight Frank.

Knight Frank’s Perth CBD Office Market Report also found the vacancy rate in the Perth CBD office market was likely to decline after this year, following new supply coming online in 2023.

Knight Frank Chief Economist Ben Burston said the Perth CBD recorded a high level of net absorption over the past two years, reflecting the sustained strength of economic and employment growth.

“There was positive absorption of more than 6,000 square metres in the second half of 2022, bringing the total over the past two years to 87,000 square metres,” he said.

“This reflects 4.8 percent of total stock; the highest of any major CBD over the past two years.”

The report found absorption of B grade (41,000sqm) and A grade (37,000sqm) space has been particularly strong over the past two years.

“The resilience of B grade is in contrast with other major cities which have seen a more pronounced concentration of absorption in Premium and A grade,” said Mr Burston.

Knight Frank’s Head of Office Leasing WA Rick McKenzie said while there are signs the Australian economy was slowing, Western Australia was outperforming.

“Western Australia has had the strongest growth of all the states in employment over the past three years of 8.6 percent,” he said.

“Our state continues to benefit from elevated bulk commodity prices and significant volumes of investment activity across a number of sectors.

“Looking ahead, while business confidence is subdued, the pace of recent employment growth and the resulting very tight labour market augur well for sustained office demand as migration continues to improve.

“Businesses and consumers alike are waiting for a pause in interest rate rises and for signs that inflation has peaked, and this will help restore confidence in the second half of this year.”

The Knight Frank Perth CBD Office Market Report found a sustained run of positive absorption and the strength of the WA economy has promoted a return to rental growth.

Prime net face rents rose by 2.2 percent over H2 2022 to average $651/sqm, taking them 3.9 percent higher over the year, while average prime incentives reducing from 49.6 percent to 48.8 percent.

Rental growth was even stronger in the secondary market, where net face rents rose by 3.9 percent over the six months to January to be 5.6 percent higher over the year.

“As a result of ongoing above-average demand, a modest supply outlook beyond 2023 and high inflation, prime rents in the Perth CBD office market are expected to continue to grow, although at a slightly lower pace than in 2022,” said Mr McKenzie.

“Perth’s recent history and the fact that rents remain well below previous peaks suggest that it has the potential to outperform other markets in the recovery from the pandemic.

“The limited supply pipeline will allow the market to gradually return to a lower rate of vacancy and this will help to maintain the recent growth trajectory.”

The Knight Frank research found vacancy in the Perth CBD office market decreased by 0.2 percent marginally over H2 2022 to 15.6 percent.

Vacancy remains tightest in Premium grade at 6.6 percent, with A-grade sitting at 16.7 percent and B grade, at 20.9 percent.

Mr Burston said supply additions would reach 79,000sqm in 2023, the highest annual addition since 2015, which would likely see overall vacancy rise this year, but the fact that there was no new supply scheduled for completion in 2024 or 2026 would help to facilitate the ongoing recovery of the CBD market.

“With an outlook for sustained office demand and limited new supply beyond 2023, we expect the vacancy rate to decline steadily over the next few years to around 12 percent by the end of 2026,” he said.

“However the potential development of a further 70,000sqm at Lot 4 Elizabeth Quay could significantly impact the forecast market recovery.”

The Knight Frank research found a further widening in office yields in the Perth CBD office market, but an increasing divergence between Premium and A-grade, with Premium more resilient at 6.2 percent on average, compared to the A-grade average of 6.9 percent.

“The divergence partly reflects perceptions of income security and long-term growth potential, with investors prepared to factor in greater future rental uplift for Premium assets as opposed to A grade,” said Knight Frank Director Investment Sales Tony Delich.

The last quarter of 2022 was relatively subdued with few large sales taking place in the Perth CBD office market, but compared to other CBD office markets Perth saw relatively strong deal volumes.

This was led by Realside and Lendlease’s acquisition of 108 Georges Terrace for $340 million and the acquisition of Allendale Square by Centuria and MA Financial for $223 million.