Office rents in Perth are set to decline further and stay low for a decade as demand for space continues to fall amid the ongoing wind back in resource sector construction, a leading research firm says.
Unveiling its latest 10-year forecast, industry research firm BIS Shrapnel says it expects prime net stated rents throughout the WA capital to decline by a further 20 per cent and net effective rents to drop by a further 23 per cent over the next two years before staying low throughout the remainder of the decade and not reaching current levels again during that period.
BIS senior project manager Lee Walker said ideas that a lull in new stock coming onto the market would precipitate a bottoming out of the current downward cycle in the market were incorrect and that demand would continue to fall as resource investment continued to wind back.
“It’s too early to call the bottom of the cycle,” Walker said. “There’s more pain to come for building owners. The balance of power in leasing negotiations will clearly favour tenants over the next few years.”
As is widely known, the office market in Perth experienced an extremely strong period throughout the boom in resource sector construction activity as the peak of the investment cycle saw vacancy rates plummet to as low as four per cent in 2012.
As developments such as Chevron’s Gorgon and Wheatstone projects move toward completion, however, vacancy rates have spiraled out to around 22 per cent whilst prime net stated rents have fallen by around 20 per cent and net effective rents have dropped by around 60 per cent.
Along with the direct impact of reduced demand for space on the part of resource sector clients themselves, the decline is being exacerbated by massive levels of stock additions, along with the flow on effect of lower levels of resource construction activity upon the broader state economy.
Between 2010 and 2015, CBRE reckons around 250,000 square metres of net space were added to the market amid what was then extremely strong demand from resource sector clients.
In terms of the economy, meanwhile, state final demand fell by 4.9 per cent last year whilst consumer sentiment levels remain subdued.
Although some have suggested the cycle may bottom out amid a limited pipeline of new supply over the short term, Walker says this is not the case.
He says the resource sector is less than halfway through its expected contraction in investment activity, and that this alone will more than offset any beneficial impact to the market from a rise in levels of production from these resource assets.
Furthermore, the completion of Woodside’s new 55,000 square metre headquarters at 98 Mounts Bay Road in 2018 will push the vacancy rate up to 24 per cent as of June that year, Walker says.