A significant drought in new premium office supply is set to grip Perth's central business district for the coming years, with fresh development unlikely to become financially viable until around 2030, according to a detailed analysis by Knight Frank and KPMG.
Supply Pipeline Hits Record Low
The report, titled High Economic Rents Drive Perth Supply Drought, reveals that Perth may not see new top-tier office stock for approximately eight years. Furthermore, any development initiated after feasibility returns would require an additional three years for construction, potentially pushing completions to 2033.
"While other cities around Australia will also face a lack of supply for premium CBD office stock, Perth stands out as a city with a particularly scarce supply pipeline," explained report co-author and senior economist Alistair Read. "There is no new supply under construction that is expected to be completed beyond 2025, marking a record low."
Economic Rents Surge Creates Feasibility Gap
The analysis focuses specifically on premium office space, defined as the highest tier of commercial property based on location, quality, and amenities. This category typically commands the top five to ten percent of market rents.
The core issue stems from a dramatic rise in Perth's economic rents since early 2021. Economic rent represents the level of rent required to make new construction financially feasible.
"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 stated.
Data shows economic rents for premium CBD towers have doubled from the first quarter of 2021, now sitting at $1280 per square metre. This figure is a staggering 46 percent higher than the forecast rent of $880 per square metre upon completion for a building starting construction now and finishing in late 2028.
Landlords to Benefit from Tightening Market
This supply constraint is poised to benefit property owners significantly. Net effective rents for premium CBD offices are projected to grow at an average annual rate of 9.1 percent from the last quarter of 2025 through to the end of 2030.
This projected increase starkly contrasts with the preceding decade's performance, where premium rents grew by a modest average of just 1.9 percent per annum up to late 2025. Office rents have only increased by 22 percent over the past five years, but are forecast to rise by 5.8 percent annually over the next five.
"This historically wide gap between economic and forecast rent underscores the challenge of achieving financial feasibility for new office developments in the current market environment," Mr Read emphasised.
Strategic Advice for Tenants and Market Outlook
Knight Frank's Alyson Martinovich advised tenants to prepare for increasing competition for limited premium space. Organisations should consider bringing forward decisions regarding potential relocations. Alternatively, businesses might explore reducing their physical office footprint through expanded work-from-home arrangements.
Knight Frank's WA managing director, Jeremy Robotham, noted that the current premium office vacancy rate in the Perth CBD sits at 10.8 percent. However, this availability is expected to tighten relatively quickly given the impending supply drought.
The confluence of high construction costs, elevated interest rates, and shifting market yields has created a perfect storm, delaying new premium office development in Perth for the remainder of this decade. All eyes will be on the economic indicators as the market approaches the 2030 feasibility horizon.
