As resource work drops back, office markets in Brisbane and Perth are coming under extreme pressure as rents tumble and vacancy rates soar.

Having experienced the tightest market conditions by far of any major capital in Australia during the peak of the resource boom, Perth has seen vacancy rates in its CBD fall blow out from less than four per cent several years ago to a whopping 18 per cent in the first quarter of 2015 according to CBRE. Prime face rents, meanwhile, have dropped 7.3 per cent in the past year and incentives (32 per cent) have almost doubled.

Vacancy rates in Brisbane, meanwhile, have more than doubled over the past four years to hit 15.1 per cent, whilst rents have stabilised but remain on a downward trend.

Brisbane vacancy

Brisbane vacancy

Not surprisingly, this is all being driven by the winding down of the construction phase of the resources boom. The impact has been particularly severe in Perth, where the market is being affected not only directly as resource sector clients pull back on office space requirements, but also as the state’s economy – which does not benefit from the same degree of diversification as Brisbane’s does – shrunk by 1.7 per cent over the 12 months to December 2014.

Evidence of the fall back on occupancy requirements can be seen through the volume of space resource clients are putting out to sub-lease, which CBRE now puts at a total of 71,280 square metres, or 4.4 per cent of available stock. In the first quarter of this year alone, BHP, Calibre, Atlas Iron and Rio Tinto put more than 22,000 square metres of occupied space out to the market for sub-lease availability.

In Brisbane, meanwhile, a similar pullback in the resources sector saw the economy contract by 3.4 per cent over the year to December and has seen population growth fall to its lowest level in 15 years.

Going forward, expectations about the fortunes of both markets are poor, though to different extents and for different reasons. In Perth, CBRE reckons rents will contract by 8.4 per cent and incentives will grow to almost 40 per cent as the addition of 133,000 square metres (8.1 per cent of stock) including space at Kings Square, Brookfield Place and the Old Treasury Building sees vacancies blow out to 20.5 per cent.

Perth  vacancy

Perth vacancy

In Brisbane, vacancies are also expected to top 20 per cent during 2016 once new additions such as 1 William Street and 480 Queen Street come online. With an economy which is significantly less dependent upon resources compared with Perth, however, Brisbane faces a less negative picture regarding demand compared with the nation’s westernmost capital amid an improving housing market and modestly improving conditions in sectors such as tourism and retail. Indeed, while stagnant for now, white collar employment growth throughout the state is tipped to return to a modest point of expansion in coming years.

On the investment side, the weakness in underlying market fundamentals has seen transaction volumes in Perth drop to their lowest level in more than 10 years. Yields have actually compressed slightly in recent times and CBRE expects further compression this year amid continued accommodative monetary policy settings. Likewise, similar factors are expected to underpin a modest degree of yield compression is expected to continue in Brisbane, helped along by still respectable levels of investor demand for quality CBD stock.

Outside of the Brisbane CBD, vacancy rates are actually expected to decline in the Near City area from around 13 per cent now to around 10 per cent in 2017 as all anticipated sources of new supply remain pre-committed and absorption is expected to be mildly positive over the next two years.

Consistent with the poor operating conditions in Perth, the market in West Perth is expected to see flat rents and a further rise in vacancies, albeit not to the same extent as the vacancy blowout in the CBD.

perth office space