Drought in premium CBD offices to hit with new development not feasible until 2030, new report claims

Perth is facing a drought in new premium office supply over the coming years, with a new report showing it may take up to eight years before the city receives new top-tier stock. Knight Frank’s report, High Economic Rents Drive Perth Supply Drought, found the level of rent required to make new office developments feasible is unlikely to be reached in Perth until around 2030, with new buildings then taking a further three years to construct. Landlords are set to benefit from the tight supply, with net effective rents for premium CBD offices forecast to grow at an average rate of 9.1 per cent per annum from the December quarter of 2025 to the December quarter of 2030. This growth is well above the 10-year average to late 2025, when premium rents increased by just 1.9 per cent per annum. “While other cities around Australia will also face a lack of supply of premium CBD office stock, Perth stands out as a city with a particularly scarce supply pipeline,” report co-author and senior economist Alistair Read said. “There is no new supply under construction expected to be completed beyond 2025, marking a record low.” The report refers only to premium office space, the highest tier of commercial property based on location, quality and amenities, and which typically commands the top five to 10 per cent of market rents. It said the lack of new supply was driven by a sharp rise in Perth’s economic rents — the level of rent at which construction of a new development becomes feasible — since 2021. “Economic rents have surged due to a significant rise in construction costs, interest rates and incentives, as well as a softening in yields and the resulting fall in asset valuations,” Mr Read said. “Economic rents for premium office towers in the Perth CBD have doubled since the first quarter of 2021 and now sit at $1280 per square metre. “That is 46 per cent higher than the $880 per square metre forecast level of rent on completion, assuming construction were to begin now and finish in the December quarter of 2028.” He said office rents had increased by just 22 per cent over the past five years. Over the next five years, rents are expected to rise by an average of 5.8 per cent per annum. “This historically wide gap between economic and forecast rents underscores the challenge of achieving financial feasibility for new office developments in the current market environment. “Development is forecast to become viable again around 2030, meaning there may be no new premium developments completed until 2033.” Knight Frank’s Alyson Martinovich said tenants should prepare for increased competition for premises by bringing forward decisions on whether to relocate. Alternatively, they may consider reducing their office footprint through increased work-from-home practices. Knight Frank managing director WA Jeremy Robotham said the current 10.8 per cent vacancy rate for premium stock in Perth’s CBD office market was expected to tighten relatively quickly.