Perth s high office vacancy rate is an issue for old buildings

Perth’s high office vacancy rate is an issue for old buildingsPerth has the highest CBD office vacancy rate in Australia but unlike previous cycles much of the vacancy is in older buildings. The Property Council’s Office Market Report found the Perth CBD vacancy rate was 16.6% in July 2015. However a deeper dive into the numbers reveals the vacancy rate for prime office buildings in Perth was just 9.5% while the B-grade office building vacancy rate was 21.5%.Commentators are drawn to comparisons with the last time office vacancies in Perth rose to similar levels, some 20 years ago. Then, vacancies soared across all grades and prime buildings recorded the largest vacancy rates. This isn’t happening in 2015 partly because the economy is different, but the main reason is because the new office supplies are mostly pre-leased. There is very little speculative office building this time round, which has introduced a level of discipline in the office market not present in the 1990’s.However many of the tenants in the pre-leased new office developments came from existing buildings that will also require filling with new tenants. This domino effect is causing higher vacancies in Perth’s older buildings, most notably in the B-grade stock which is almost a third of the market. New demand for office space in Perth has eased significantly with the slowing in investment in new mining and LNG projects to the north of the state. What is the future of Perth’s ageing office buildings? The options for an owner include repositioning abuilding for more affordable rental paying tenants, riding out the cycle and upgrading a building to maintain tenants and income, re-adapting a building to an alternative use like residential apartments or hotel, redeveloping the property altogether or ultimately, selling the property.It is worth noting that within four years of the peak in office vacancies in the 1990’s, the stock of office space in the Perth CBD contracted by 7%, or 100,000 sqm. This suggests a significant number of properties were either converted or redeveloped to another use.The future of old commercial buildings in Perth will be a hot discussion point at the Property Council’s WA Commercial Property Conference in October 2015.For more information about the Perth office market, see the Property Council’s latest Office Market Report.