Office vacancy in Perth has experienced volatile peaks and troughs over the years. However there has been recent talk of the Perth market ‘normalising’ or ‘stabilising’. But what is a ‘stable’ level of vacancy for Perth, and what are some of the factors keeping vacancy elevated?

The 20-year average vacancy rate for Perth is 10 per cent, but has fluctuated wildly between 0.1 and 24.7 per cent. In this time, the CBD has grown in size by 33 per cent, experienced the Global Financial Crisis (GFC), Iron ore boom, LNG construction boom, and Iron ore price crash.

In late 2016, CBD vacancy showed its first quarterly improvement in five years. Current economic forecasts in Western Australia aren’t pointing to any rapid recovery, rather a gradual improvement in conditions. Forecasts for net absorption in turn indicate a steady recovery, but not at the rates seen in the height of the most recent boom.

Compared to 2012 (peak occupancy), white collar employment across the CBD and West Perth has only declined by an estimated 1 per cent, however occupied stock has declined by 14 per cent. Almost the same amount of office workers are employed in 14 per cent less space. Following the 2012 peak, many companies contracted or consolidated to reduce costs, and are now accommodating staff more efficiently.

With good quality office space now more affordable in the CBD, opportunistic tenants may be able to ‘breathe out’ and plan for future growth by taking up additional space. This may continue to attract tenants from the suburbs and West Perth market, as well as drive growth in active sectors in the CBD including legal, education, healthcare and finance.

For vacancy to return to the 20-year average, it would require occupied stock to increase by an ambitious 250,000 sqm ie. net absorption of 250,000 sqm. The 20-year average for annual net absorption is 11,300 sqm. However in the last 10 years Perth has seen two consecutive years of net absorption over 100,000sqm, as well as two consecutive years of -65,000 sqm. The Perth market can turn very quickly, but that is not what the current forecasts suggest.

A gradual recovery in occupied stock will see vacancy rates recover slowly. However, vacancy is likely to remain at above 15 per cent for the short to medium-term unless a sustained recovery in commodity prices drives the next phase of investment in the resource industry. The withdrawal and recycling of older, vacant stock (which has been minimal) could be very significant to the recovery in vacancy. This is most likely to occur in conjunction with a recovery in the CBD apartment market.

At first glance 15 per cent vacancy may seem high, but viewed in another light, this could potentially have a positive outcome for the Perth market. Vacancy of 15 per cent would likely reflect growth in CBD employment, scaling back of incentives and a sense of balance that hasn’t been seen for many years. A slow and steady recovery isn’t something the Perth market has seen very often, but is likely to restore confidence for investors and occupiers.

Figure 1: Perth CBD and West Perth office market occupancy vs white collar employment

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