Falling iron ore prices sent a cool change through Perth's office market in July, stalling leasing deals and ushering in a wave of caution to a market that has captured international attention because of its strong growth.

The resources sector, which occupies 28.5 per cent of the CBD office space, and in particular iron ore companies and businesses that serve them, were among the first to hedge their bets on signs Chinese demand for ore was slowing.

According to Ian Edwards, state director asset services at Knight Frank, the sector offloaded close to 50,000sqm of surplus office space into the sub-lease market.

"There's already been a lot of interest in this space and we believe it will be taken up quickly but some will be withdrawn in quarter one and two when industry picks up steam again," he said.

Tenants, meanwhile, defaulted to a wait-and-see stance and agents were left with a market that had changed overnight.

"We went very quickly from a market where there was more demand than space to a market where businesses were giving back space," David Cresp, Colliers International director for office leasing, said.

"The leasing slowdown mostly affected the big end of town, but a good level of activity continues for smaller tenancies in the 100sqm to 500sqm range."

While market volatility brought an abrupt end to project space leased by iron ore companies and engineering firms, demand for office space from the oil and gas sector was unaffected and agents are forecasting oil and gas will be a growth highlight this year.

"There's a lot of positive sentiment that the oil and gas sector will continue to be gearing up in 2013, the sector is in expansion mode and we expect office requirements to increase," Mr Cresp said.

According to agents close to the leasing and investment deals, Perth is now regarded as a world-class mining city.

"We've seen a steady number of new businesses servicing the resources industry quickly progressing from serviced office space to looking for space of their own because they grow so quickly," Mr Cresp said.

Knight Frank said the second half rent drift in 2012 wiped about $25 a sqm from CBD rents.

"Perth's office market is attached to the fortunes of China, there's no question, but LNG is not so much China-based and it's still driving the market," Mr Edwards said.

Data from property consultancy Y Research shows that of the 28.5 per cent of the CBD offices being used by resource companies, iron ore accounts for 13.4 per cent and the oil and gas sector accounts for 12.7 per cent.

Y Research principal Damian Stone is forecasting the CBD vacancy rate will rise as high as 7 per cent to 7.5 per cent by next month, when the Property Council releases its half-yearly office vacancy report.

The Property Council expects the rate to fall in the second half of 2013 as the sub-lease space is absorbed.

"In 2013, vacancies in A-grade buildings will remain low and an increasing number of tenants in these buildings will be paying more than $900/sqm," Mr Stone said.

"At the same time, rental growth in the secondary market is likely to moderate over the first six months in 2013 because of sub-lease vacancies."

With more office space options, Mr Stone said rental growth would also be slower this year than the 20 per cent rental growth recorded last year.

He said the city's next space squeeze would be tighter because it would be difficult to reduce current workspace ratios of 12sqm to 15sqm per person using traditional workplace design. In 2007-08, workspace ratios were 16sqm to 20sqm per person.

CBRE's senior director office services Andrew Denny also said rental growth this year would be lower than last year.

"The expectation of higher rents are just not there but we may still see a degree of growth at a reduced level from 2012 and building owners are not going to be disappointed with that," he said.

Few changes to tight lending restrictions in 2012 that stymied new office projects are expected this year.

"The European debt problems will continue and local banks still have no appetite to lend for property," Mr Edwards said. "The few projects financed with private capital sources are in the lucky spot of not having to compete against other building owners for bank finance."

Ian Mickle, director of investment sales at Colliers International, said the value of CBD sales for 2012 could be as high as $600 million if the share of Allendale Square settled before the year end. However, without that, the total was about $400 million, making it an average year for transactions.

"Investment sentiment for Perth is still very strong - leasing rates did soften but the long-term fundamentals offered by the resources industry mean Perth is very well placed," he said.

Mr Mickle said reasonable volumes of overseas investment and from international funds wanting exposure to the high-growth market of Perth would continue this year, concentrated on premium and A-grade buildings.

We went very quickly from more demand than space to a market where businesses were giving back space. " Colliers International's David Cresp

The West Australian

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