Perth to be the top office performer in 2013 but Sydney to step up from 2014: Frank Gelber

The Perth CBD is expected to be the top performing capital city office market this year despite mining companies reducing their costs and office space requirements, says BIS Shrapnel chief economist Frank Gelber.

However, Sydney is the best bet over the next five years with very little new CBD office space coming onto the market over this time period.

“As demand recovers, vacancy rates will tighten, leasing incentives will reduce, rents and property values will rise,” he says.

Gelber expects Sydney to be the top performing office market from 2014 onwards, despite projects like Barangaroo South adding over 120,000 square metres in new office space and due for completion in 2015.

He says the impact of Barangaroo has been built into BIS Shrapnel’s forecasts and he rejects “crazy comments” about the project pushing the Sydney vacancy rate to as high as 9%.

However, he says the other capital city office markets including Melbourne are “way behind”.

BIS Shrapnel is forecasting the Melbourne vacancy rate to reach 10% over the next few years from a current vacancy rate of 6.9%.

New projects and a lack of demand for fringe office space will also keep the vacancy rate elevated in Brisbane.

“This year, we think Perth will again top the pops – despite a recent setback in demand.

“While strong in the first half, net absorption turned negative in the second half of the year,” Gelber writes in The Australian.

Negative net absorption means that more office space was vacated than leased over the second half of 2012  - as mining companies downsized their space requirements.

Gelber highlights though that while mining investment is no longer growing at the “extraordinary rate that drove growth in mining services and hence office demand over the past decade, “it is [still] growing”.

Furthermore supply will dry up once the current spate of office projects are completed.

According to the most recent Property Council of Australia office report for the second half of 2012, the Perth CBD vacancy rate eased from 4.2% to 5.7% in December, but still remains the tightest capital city CBD office market.

“The Perth office market was affected by cost-cutting in resources companies, particularly the iron ore sector, last year. This resulted in less demand for office space by firms providing professional services to the sector”, said Property Council executive director, Joe Lenzo.

Lenzo says demand for Perth office space was at its weakest since 2009, with premium office space experiencing the largest increase in vacancy rates from 1.3% to 4.5% with a negative net absorption of just over 10,000 square metres.

However, mirroring Gelber’s sentiments, he says the new office pipeline will “tighten significantly in 2013” with only 12,249 square metres of new office space coming online in the Perth CBD over the year – a fraction of 180,000 square metres in new office space added in 2012.

From 2014 onwards the new office pipeline will gradually increase again”, he says.