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APIL Market Commentary – Office

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The Perth CBD continues to have the highest CBD vacancy rate in Australia at around 18% as seen in Figure 1. However, on a positive note, APIL’s three Perth offices have a combined vacancy of only 7.8%.

JLL research for Q2 2020 reports the average national CBD vacancy rate rose by 1.8% over the quarter. Perth’s total vacancy rate increased by 0.6% over the June quarter to 20.1%. It is above Adelaide (14.7%), Brisbane (12.8%), Canberra (8.2%), Melbourne (7.7%) and Sydney (7.5%).

Premium-grade vacancy declined in Q2 by 0.2% to 6.7%, the lowest level since Q3 2017. This statistic highlights the flight to quality office space during this economic downturn. Vacancy, in general, has been increasing across secondary stock over the last three years as a result of tenants upgrading their office accommodation to higher quality buildings.

In Q2 2020, secondary stock vacancy increased by 0.1% in Perth to 27.5%. Vacancy in Perth’s prime grade buildings increased by 0.9% over the quarter to 15.3%. Overall net absorption decreased by 10,500 sqm during Q2, and contributed to the -4,800 sqm annual net absorption.

Expectations for a recovery in the Perth office market have been softened significantly, with overall vacancy rate now anticipated to remain at elevated levels for longer. JLL research expects the vacancy rate to increase for the remainder of 2020 before a slight recovery in 2021.

Leasing activity has slowed during the pandemic period and this may lead to more competition between landlords to provide more attractive rental agreements to fill in vacancies.

The negative impact of COVID-19 for the demand of Perth CBD office space has so far not resulted in reduced rents and/or higher incentives. Prime and secondary gross effective rents and incentives all remained stable throughout the June quarter.

Perth CBD prime office yields are forecast to soften by 0.25% to 6.75% by year end. Prime yields are expected to remain at this level throughout 2021, before compression resumes in 2022 as economic and office market conditions improve.

In the long-term, Perth CBD office vacancy rate recovery is looking positive due to sectors including mining, professional services, and healthcare sectors showing signs of growth as a result of an improvement in the broader economic environment and the appreciation of the $AUD, commodity prices and consumer demand.

There is some uncertainty surrounding future demand for office space due to changes to working-from-home conditions and social distancing requirements. Almost overnight, the pandemic led to millions of people working from home. The future of office accommodation remains unknown, but many commentators believe that social distancing will see a higher allocation of employee to workspace ratio which will be offset by employees working from home. The general consensus is that the current demand for office accommodation in the Perth CBD will remain stable in the near future.

Changes to working habits are likely to have a long-term impact on the Perth office market, however the full extent is not known yet. The quicker Australia is able to recover from the pandemic, the more optimistic investors can be about the commercial property sector.

The COVID-19 situation is changing month to month, with APIL’s position on the Perth office market being ‘watch and see’. Some forced sales in the 2021 year may be enticing for a possible APIL acquisition.

Figure 1 (Source: Property Council of Australia Office Market Report)

 

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