With vacancy of less than 1% in 2006 and 2007, the investment phase of the mining boom triggered a strong construction cycle in the Perth CBD office market. Between 2009 and 2012, 316,000 sqm of office space was added to stock. This was supported by very strong growth in office demand in 2010, 2011 and the first half of 2012.

Fast-forward to 2015, and the Perth office market is in a very different place. Vacancy has risen steadily since 2012, currently at 16.6%, with negative net absorption of 68,600 sqm recorded in 2014. With the transition from the construction to the production stage of the mining boom well and truly under way, and decade-low iron ore prices, the impact is being felt by tenants in the Perth CBD office market. Contractions and consolidations by mining companies, engineering firms, and businesses servicing the resource industry have impacted heavily on vacancy, with this trend expected to continue through the remainder of 2015. An additional 149,000 sqm of office supply is expected to enter the market in 2015, the highest year of supply additions since 1982.

One common response to strong supply cycles is an elevated level of office withdrawals, either for major upgrades to compete with the new supply coming online or for a range of other uses. This occurred through the 1980s in Perth, with withdrawals as a percentage of completions equalling 44%. However, in the more recent supply cycle, stock withdrawals have been very low.

Given the current supply pipeline, why isn’t there a bigger withdrawal story in the Perth CBD office market, and what may drive withdrawals going forward?

Withdrawals through the decades (as a % of total completions)
Source: JLL Research

While withdrawals would be expected in older, secondary grade stock, the Perth market has less than 300,000 sqm of C and D grade stock. By comparison, the Adelaide CBD market has closer to 500,000 sqm of C and D grade stock.

The residential population of the City of Perth is anticipated to continue to grow, which may lead a push for redevelopment of older stock to residential use. However, buildings that might be earmarked for conversion may not be suitable for residential use and may require significant investment. Strata ownership, and the requirement for apartments to have balconies, may make such redevelopment a difficult process.

There are also potential opportunities for hotel development given forecast growth in tourist arrivals. The Adelaide market has seen older stock converted for education purposes or student accommodation, however there has only been one example of conversion for education use recently in the Perth CBD.

If the level of withdrawals begins to return to the levels seen in the 1980s and 1990s, this may offer some much needed relief for the vacancy rate in the CBD. Significant withdrawals would assist in offsetting the impact of new supply.

Source: JLL Research

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