Could WA’s forgotten office market be set for a revival?

In the latest edition of RWC’s Between the Lines, a panel of industry experts mapped out how a massive shift in legislative policy, skyrocketing construction costs, and automation are shaking up both the residential and commercial sectors in the Western Australian market.

The webinar was hosted by RWC’s head of research Vanessa Rader, alongside Stephen Harrison, joint managing director of RWC Western Australia, and veteran market analyst and commentator, Gavin Hegney.

Together, the panel broke down why WA’s unique resource-driven economy is currently creating unprecedented “sweet spots” for contrarian investors particularly within the heavily discounted office market.

Reflecting on the unprecedented residential boom of the past five years, the panel highlighted that while WA housing values have doubled, the market has not yet overshot its healthy equilibrium compared to its historical 2008 peak.

“Values have doubled, and that’s been a classic end of cycle boom. ..This time the boom has us in about a third or fourth position as far as medians go relative to other other capital cities and that’s about where we should be,” Mr Hegney said.

Mr Hegney also pointed to WA’s remarkably tight 1.5 per cent rental vacancy rate as an “insurance policy” guarding against a major market crash.

“We’ve got the second highest rents in Australia… And the interesting thing is, the tenants take about 24 per cent of their income, to pay an average rent. If you want to buy, it’s about twice that, about 48 per cent. So, even though it’s second highest, there’s still quite a bit of tenant affordability in there, and capacity to pay higher rents that may get tapped into with changes to negative gearing, etc.”

A major talking point was the anticipated wave of capital flowing out of residential real estate and into commercial property, driven by potential changes to negative gearing and the flexibility of self-managed super funds (SMSFs).

Mr Harrison predicts a massive spike in demand for sub-$2 million commercial assets.

“It’s definitely going to increase demand and yields are going to sharpen. You’re going to see a lot of investors who are used to lower yields in residential areas looking at WA commercials and saying, ‘That looks like great value.’ In Western Australia, we are typically half a percent to a percent higher in capitalisation than the East Coast,” Mr Harrison said.

This investor appetite is breathing new life into small strata-titled industrial warehouses. Absent from the market for nearly a decade, warehouses priced in the $500,000 to $600,000 range are roaring back into vogue, perfectly tailored for SMSF buyers.

However, the panel issued a warning to newcomers moving from residential to commercial. Mr Hegney warned, “Cost does not equal value, no. And the real trick there is to try and get something that at cost that you can then put tenants into, etc. and create value, and then you’ve got this automatic uplift… it’s a different game, very different game.”

While the industrial sector remains tight due to a structural undersupply of serviced land and grid power, the panel identified the Perth CBD office market as the ultimate contrarian play.

Currently, office assets are trading significantly below their physical replacement costs. Mr Harrison explained, for a new office to be financially feasible today, developers would have to charge upwards of $1,000 per square metre, that’s more than double the current effective market rate.

Because of this, the pipeline for new office supply has completely dried up.

“The velocity of demand moves a lot faster than the velocity of supply. Demand can move in 12 to 24 months; supply takes five to 10 years. We know no new supply is coming out of the ground… There is going to be a sweet spot, because the sweetest spot in any market is always the inability to supply market demand. That’s when prices rocket,” Mr Hegney said.

The panel discarded the narrative that work-from-home trends and artificial intelligence will permanently depress office space, pointing instead to WA’s unique role as a global hub for automation.

Mr Harrison highlighted 256 St Georges Terrace, the current headquarters of Fortescue, as an example of how modern tech is actually filling local office seats.

“You go into that building and there’s floors of staff sitting in front of computer screens driving dump trucks in the Northwest,” Mr Harrison explained.

“A lot of automated robotic services are getting driven by staff sitting in an office on St George’s Terrace. “

Heckney agreed, concluding that Perth’s world-leading expertise in remote mining operations positions it perfectly to service global markets in Canada, West Africa, and beyond.

Closing out the discussion, Vanessa Rader turned the focus toward future residential solutions, asking the panel whether the current climate presents an opportunity for adaptive assets like co-living and build-to-rent (BTR) to meet local housing requirements.

The panel agreed that the massive drop in asset values for secondary office stock has opened up a glaring, highly cost-effective window for developers – though it is not without strict physical limitations.

“The theory is very strong, but the practicality of turning a vacant office building into a residential space has its challenges…things like kitchens and flooring,” Mr Hegney said.

“They are really cost-effective right now because office values are coming down. As soon as a few of these conversions happen, though, the office market will take off again. But as it stands now, it is a glaring opportunity to have people occupy them as living spaces.”

Stephen Harrison revealed that major market players are already moving on the trend, pointing out that co-living configurations can actually solve some of the structural pain points of a traditional apartment conversion.

“We are already being brought into conversations with developers about this. I can see a very similar success story for co-living spaces.”

“The beauty of co-living is that it sits outside the standard residential tenancies act. There are no ‘no grounds’ evictions like we’ve seen causing friction in the east coast markets, and it gives tenants a lot more flexibility too,” Mr Harrison concluded.