Secondary Perth properties miss out on tenants’ flight to quality: Y Research

Secondary Perth properties miss out on tenants’ flight to quality: Y Research
Secondary Perth properties miss out on tenants’ flight to quality: Y Research

Tenants upgrading to higher quality suburban and CBD office properties have vacated 40,000 sqm of office space across Western Australia’s suburban office markets in the past 12 months, according to a new report.

West Australian commercial property information firm Y Research’s latest, West Australian Suburban Office Report, shows that the 

Vacancy rate across Perth’s 50 suburban office markets have risen to 17.7% from 16.5% in November 2016, according to the June report.

A weak economy and increasing competition for office tenants, large and small, from office owners in the Perth CBD, West Perth and other suburban markets, are pressuring Western Australia’s suburban employment hubs, according to chief problem solver of Y Research, Damian Stone.

In the past six months, 11 suburbs recorded more than 1,000 sqm of negative net absorption including major markets, Northbridge, East Perth, Leederville, Fremantle and Midland. 

While relocations to the Perth CBD and suburban markets have played a role, the major driver of higher vacancies in the first half of 2017 continues to be downsizing with companies, such as the Sunday Times, Boral, NAB and the Water Corporation, vacating space in the last six months. 

Despite the higher headline vacancy rate, what is becoming increasingly evident is tenants’ flight to quality, said the report. 

“Improved affordability, in terms of market rents and leasing incentives, combined with increased choice due to recent office developments and the level of vacancy, is allowing tenants unprecedented choice of tenancy. 

“The flight to quality trend is highlighted by tenants upgrading from secondary spaces in their current suburb or relocating to a neighbouring market, typically within 5km.”

Retailer Bunnings’ move from industrial space in Welshpool to a portion of the recently completed A Grade building in Rivervale was the largest leasing transaction in the reporting period and also evidence of the flight to quality. 

Reinforcing the trend, infrastructure operator Brookfield Rail moved from Welshpool to Bravo at Perth Airport while aged care provider Bethanie Group shifted from Claremont to WorkZone in Northbridge. Residential developer Satterley moved from South Perth to Troode Street in City West.

This “flight to quality” is having two main impacts on Western Australia’s suburban office markets – either in terms of suburb or building, you are top of the market or not in the market for tenants, says the report.

With multiple choices for A Grade space in desirable suburbs such as Subiaco, Northbridge and Herdsman, there are limited or no tenants in the market for older, secondary properties in non-core locations with limited - amenity, public transport links and building services such as end of trip facilities. 

As a result, market rents for high quality spaces have stabilised in the past six months, while discounting continues across secondary properties and non-core locations. Secondary property owners unable to compete on building quality are using price to drive absorption. Asking prices under $100 per sqm are increasingly commonplace, it says.

“Ten years on from the peak of Perth’s office space crunch and the wave of decentralisation of tenants to the suburbs, the short-term challenges are mounting for Perth’s suburban office markets - continued competition from Perth CBD and West Perth owners, amenity short falls in major markets, vacant space in recently completed developments and potential space consolidation from suburban office markets’ main occupier, the State Government,” notes the report.

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