Almost one-quarter of commercial buildings in Perth are empty and the oversupplied market is set to bloat further, giving tenants even stronger leverage to negotiate a good deal.
But landlords should ride out the post-mining boom pain, property experts say, with tenant incentives as high as they can go.
Empty city office space was almost non-existent at the height of the mining boom in 2008, but with the resources sector off the boil, the CBD vacancy rate has soared from just four per cent in 2012 to 22 per cent.
BIS Shrapnel says the rate is expected to climb further to 24 per cent by mid-2018 when Woodside’s new Mounts Bay Road headquarters is completed.
“It will mean increased pressure on building owners to attract and retain tenants. There’s a lot of competition,” senior project manager Lee Walker said.
Desperate landlords are offering so much in leasing incentives – the highest in the country – their effective income has halved.
Mr Walker said they should consider not giving away more, defer building upgrades and simply ride out the downturn.
“Building owners are in a difficult position at the moment,” he said.
“We would question how much higher incentives can actually go before its worthwhile.”
Matt Crofts, state director of commercial valuations for ASX-listed firm LMW, agreed now was not the time to refurbish a tired old building or convert the space to residential as Perth’s CBD accommodation market was also oversupplied.
“It’s huge capital expenditure to refit these things,” Mr Crofts said.
“Those who bought before the market peaked and have bought well, and are taking advantage of low interest rates to pay the debt down can probably afford to just ride that cycle out.”
Mr Crofts said landlords who are being squeezed by prospective tenants should lock in a long-term lease.
“If the tenant is willing to grant extended terms in exchange for a bit of rent relief in the early stages, the actual value of the asset can be protected,” he said.
“The yields will compress and that will offset a drop in rent in the early stages.
“Landlords who aren’t willing to negotiate and try to get a decent term out of their tenant are probably going to struggle a little bit – the shorter the term, the more they (tenants) can walk before the market corrects.”
Treasurer Scott Morrison said the BIS Shrapnel figures showed WA was feeling the pain of the mining downturn.
“It’s a tough global environment out there,” he told reporters in Perth.