FYI | Mar 03 2009
By Chris Shaw
The downturn in commodity prices is causing an increase in unemployment as resource companies lay-off workers. Industry research group BIS Shrapnel points out in its “Perth Commercial Property prospects January 2009 Update” it will also contribute to a collapse in the Perth office market cycle.
The group notes economic growth in Western Australia is set to fall significantly in 2009/10 on the back of lower levels of business investment and this will in turn reduce demand for office space in the Perth market. This won’t occur immediately as BIS Shrapnel believes the market will remain solid for the next six months but as projects currently underway are completed the next couple of years should see work levels drop by more than 50%.
As group project manager and author of the report Lee Waker notes, over the last few years companies have geared up to service the boom in resources investments and with most head office functions undertaken in Perth the scaling back or cancelling of a number of projects will sharply impact the local economy.
Walker’s report forecasts weakening employment in the Perth office workforce, with this fall in net absorption across the Perth metropolitan market to come to a head at around the same time as new office supply is released in 2010/11, a combination he expects will cause a spike in average vacancies from what have been record low levels. It will also mean a fall in effective rents and property values.
As an example of how strong the market has been Walker notes between 2003/04 and 2007/08 the Perth office workforce grew by around 20%, which accounted for a net absorption of around 85,000 square metres annually of office space. New supply was also limited at the same time and as a result the period saw net effective rents quadruple, which in turn pushed up capital values.
Companies moving into pre-committed leases should support the market somewhat in coming months but Walker expects as the state economy weakens some of the pent-up demand for office space will also weaken. On his numbers net absorption will decline to around 34,000 square metres in 2009/10 before turning negative the following year.
Risk is to the downside in Walker’s view as if investment in the minerals sector collapses he sees a potential scenario where net absorption falls by more than 70,000 square metres over the next two years. Adding to the problem will be the magnitude of new projects coming onto the market in the next few years, with as much as 280,000 square metres being added to CBD office space in the next couple of years.
Factoring in the new environment Walker expects CBD vacancy rates will increase to around 8% by June of next year and to more than 12% a year later, meaning tenants will start to enjoy increased power in lease negotiations. He expects this will flow through to prime CBD rents falling by a third by June 2011 as incentives increase rapidly.
In terms of investment markets, Walker suggests buyers already have the stronger position as yields have been softening and prices falling. He notes average yields for prime properties declined by 140 basis points over 2008, while for secondary yields the move was more than 200 basis points. BIS Shrapnel expects yields will soften by a further 50 basis points over the course of 2009, with a further deterioration in 2010.