Perth CBD office demand conditions on the up during 4Q22

• Headline vacancy in the Perth CBD decreased by 0.2 percentage points (ppts) to 19.0% in 4Q22, with quarterly net absorption totalling 4,400 sqm over the quarter. Annual net absorption totalled 32,600 sqm over 2022, well above the 20-year long-term average of 14,600 sqm.
• The centralisation of tenants from outer suburban markets as well as new business entrants into the Perth market remained significant contributors to net absorption over 4Q22. Occupier activity was predominantly led by tenants within the professional services sector.

Uptick in the short-term supply pipeline

• No significant office developments completed in the Perth CBD over 4Q22. Nevertheless, the existing supply pipeline is elevated with four projects under construction totalling 88,800 sqm.
• Other than developments currently under construction, the supply pipeline for both the Perth CBD and West Perth office market remains limited given elevated vacancy rates. Plans are approved for a further 12 projects in the CBD, totalling 343,800 sqm. Proposed new office projects are likely to require substantial pre-commitment to proceed.

Declining incentives support effective rental growth

• Perth CBD prime net effective rents increased over the quarter to AUD 272 per sqm per annum (0.3% q-o-q), as incentives declined marginally to 48.7%. Effective rent growth was also supported by an uplift in prime net face rents (0.4% q-o-q) to AUD 633 per sqm per annum, reflecting y-o-y growth of 1.1%.
• Rising cost of debt pressures saw Perth CBD midpoint prime office yields decompress by 25 basis points (bps) to 6.75% in 4Q22.

Outlook: Robust WA economic conditions to support office demand

• Western Australia’s (WA) economic growth has continued to outperform the national average, driven by ongoing strength within the resources sector. With a strong pipeline of resources projects approved, demand for office space is likely to be led by the mining and professional services sector.
• Economic instability from factors such as inflationary pressures and rising borrowing costs will undoubtedly reduce the attractiveness of office assets to buyers relying on leveraged capital sources. Investors are likely to be selective in terms of potential acquisitions, as both buyers and vendors undergo a price discovery phase amongst shifting economic conditions.