FEATURE: Suburban office market developers are facing similar challenges to their CBD counterparts in attracting tenants.
Suburban office market developers are facing similar challenges to their CBD counterparts in attracting tenants.
Record supply additions to Perth’s suburban office market have pushed the vacancy rate north of 14 per cent, with demand for space being offset by continued downsizing in the resources and corporate services sectors.
Statistics released earlier this year by market analysis firm Y Research showed there were around 234,000 square metres of vacant office space in Perth suburbs – the equivalent of three Brookfield Place towers.
That vacant space is expected to increase in the 2014-15 financial year, with nearly 125,000sqm of projects to be completed across the metropolitan area.
Burgess Rawson associate director Clive Norman said leasing and tenant demand was particularly slow in West Perth.
“The issue is just the lack of enquiry in this traditionally mining sector location,” Mr Norman said.
However, Burgess Rawson director Brian Neo said general sales enquiries had picked up over the past six months, especially in the strata office market.
“I have personally contracted just over 30 properties in the last six months,” Mr Neo told Business News.
“Approximately 80 per cent of those sales went to owner-occupiers, either in the medical specialists field, finance industries, IT and general office users.
“The remaining 20 per cent sold to investors where the appetite for leased investment stock is very strong.”
Most of the new suburban office development is occurring away from traditional centres such as West Perth.
The positive news for West Perth in particular is there isn’t a massive wave of new supply on the way threatening to blow the vacancy rate out any further.
The only sizeable proposed project of in the suburb is the 8,000sqm third stage of the RAC building, which has been in the pipeline for around five years and is no certainty to proceed.
Outside of the RAC proposal, there are six projects – two under construction – totalling 6,848sqm in West Perth.
Y Research chief problem solver Damian Stone said the issue for West Perth was rents were relatively expensive compared with other suburbs.
“You can get better deals in surrounding suburbs like Leederville, Subiaco and Northbridge,” he said.
Across Loftus Street, the Nexus Central office project, being built by Georgiou Construction for developer Carcione Group, has become known for its prominent ‘for lease’ sign that dominates the area.
Carcione Group is highly regarded in the industry, having delivered a range of commercial projects, including the $10 million office building at 58 Kings Park Road, and the 5,000sqm 120 Hay Street.
About five floors of office space are available at Nexus, totalling 5,600sqm, but industry sources say it remains a mystery as to who will take up the space, considering the plethora of options elsewhere.
The largest suburban office development being proposed is private equity group Sirona Capital’s $220 million Kings Square project in Fremantle.
Sirona plans to deliver 30,000sqm of office space in the heart of the port city, and has been in lengthy negotiations with the state government regarding the relocation of a major agency.
But the state government cast significant doubt over that plan in May, when Finance Minister Dean Nalder told a budget estimates committee that the financial fundamentals behind a possible shift of the Department of Housing had changed.
The issue is indicative of the challenges developers face in securing an anchor tenant to underpin office proposals of significant size.
Sirona managing director Matthew McNeilly said negotiations with the government continued in a positive light, and the company was confident of securing an anchor tenant before the end of the year.
Mr McNeilly said while a state government agency was the preferred option, the level of interest from the private sector had surprised him somewhat.
“The Perth CBD is now seen as an expensive place to operate from” Mr McNeilly told Business News.
“There are highly elevated rents, and they are still elevated, people are still paying around $750/sqm in premises that are around 30 years old, and there are cost pressures on business.
“Clearly a lot more businesses are becoming cost-focused, so decentralisation to cheaper rental premises in good locations like Fremantle is on the radar.”