Challenges and opportunities in Brisbane office market

​Brisbane, 14 November 2013 – The Brisbane office leasing market will remain challenging next year as vacancy rates continue to rise. However, the market will present counter cyclical opportunities for investors prepared to take on a degree of leasing risk as economic fundamentals being to strengthen.

That was the view presented yesterday at a CBRE Brisbane Market Outlook presentation which attracted some of the country’s largest institutional investors.

The investor activity in Brisbane has been unparalleled this year. Against a subdued economic backdrop and weak tenant demand, investment activity has already reached a record annual figure of $1.96 billion with additional property in due diligence valued at circa $600 million according to CBRE Director, Capital Markets, Flint Davidson.

Both local and offshore buyers have targeted the market, prepared to look beyond the current weakness in the tenancy market if they can secure prime assets with long weighted average lease expiries.

However, with much of this style of stock having already traded, there has been considerable focus on the likely opportunities moving into 2014 and the growth outlook for both the Brisbane market and the broader Queensland economy. 

From an historical perspective, CBRE Senior Research Manager Claire Cupitt said economic growth in Queensland had only underperformed the rest of the country for five of the past 27 years. Excluding those years, the average spread to the rest of the country has been1.6 percentage points.

CBRE is forecasting Queensland economic growth to improve from the second half of 2014, supported by strong population growth, improved consumer confidence and a sustained improvement in white collar employment.

The state will also benefit from a stronger export profile, with the annual value of exports from Queensland forecast to approach $120 billion by 2020 – around twice the current dollar value and accounting for around 26% of national exports, up on the current share of 20%.

However, there remain some short term drags on the Brisbane office market - primarily the slowdown in tenant demand from the government and resources sector and the increased supply coming to the market in the next three to four years.

CBRE Senior Director, Capital Markets, Bill Tucker noted that on an historical basis, the Brisbane CBD market had outperformed Sydney and Melbourne in relation to prime vacancy rates which had averaged 4.9% between July 2000 and July 2013, relative to Melbourne at 5.4% and Sydney at 7.2%.

He also highlighted the “generational transformation” that had occurred in the Brisbane market over the past decade.

“During this period, 1 million square metres of space has been added to the market, more than all the Sydney markets combined and double that of the Perth market,” Mr Tucker said.

This had increased the volume of office space in Brisbane by a little over 40% to circa 3.4 million square metres with the Brisbane fringe market having grown by 60% over the same period. At the same time, the number of CBD buildings with floorplates over 1,000 square metres had almost doubled, from 16 to 30, raising the bar for quality office stock.

Mr Tucker said this higher quality stock with larger floorplates had outperformed the rest of the market in relation to vacancy rates and raised questions about the future of some of Brisbane’s older quality office space, particularly in light of the fact that the prime vacancy rate was sitting at 10% while the secondary vacancy rate had risen to 18%.

“It has become obvious that there are now a number of functionally obsolete buildings in the market that won’t survive this cycle and will be demolished or converted to other uses,” Mr Tucker said.

In regard to the outlook for the overall CBD vacancy rate, Mr Tucker said CBRE’s Brisbane Capital Markets team had assessed three scenarios based on the strength of a recovery in the occupier market.

They had assessed that the worst case - and the most unlikely outcome - was for a vacancy rate of 18% by the end of 2018 if net annual absorption was just 20,000sqm - half the historic average - and there were no supply withdrawals.

However, Mr Tucker said he believed scenario B was the most likely view, a vacancy rate of 12% based on net absorption of 38,000sqm - in line with the 15 year historical average - and supply withdrawals of circa 87,000sqm.

Best case? A vacancy of sub 10% if net absorption was 48,000sqm, equivalent to the strong five-year average recorded to the end of 2012. 

Turning to the current investor interest in Brisbane, Mr Davidson said the market had gone from being a default location for offshore investors unable to get set in Brisbane or Melbourne to one that was now firmly on the radar of foreign investors.

“We anticipate there will be more offshore capital, particularly from groups who haven’t previously invested in the Brisbane market,” Mr Davidson said.

“Brisbane still offers a value proposition, with a significant cap rate spread between Sydney and Melbourne. Historically this spread had been around 90 basis points, however it is now running at over 125 basis points, which has underpinned the current appetite for high quality stock offering WALEs of over six to seven years.”

With much of this stock having traded, Mr Davidson said the focus was expected to move to the next tier of the market.

“Core stock will be difficult to put your foot on, however we think there’s an opportunity with good quality A grade buildings with good with good quality A grade buildings where investors are prepared to take a measured risk as to how the occupier market will perform,” Mr Davidson said.