_Investor interest in Brisbane CBD Office buoyed by an improving leasing market

In contrast to this steady and growing interest, particularly from offshore buyers, the level of transactions remained relatively low in the Brisbane CBD during 2016 with ten sales, or part sales, totalling $1.008 billion recorded during 2016. This was lower than the $1.20 billion recorded in the year before and a reflection of the relatively few opportunities which were available to the market during 2016. 

Despite the limited opportunities offshore investors increased their exposure to the Brisbane market acquiring $525.3 million during 2016, up from $297.1 million in 2015. As shown in Figure 4, the penetration of offshore investors into Brisbane CBD transactions was a record high level at 52%, just ahead of the 51% market share in 2010 when Keppel REIT Asia and PNB made key investments into the city. 

With six sales in the first months of 2017 and other assets such as the 50% interest in 400 George St and 120 Edward St in due diligence, the sales activity levels for the Brisbane CBD are looking promising. 

There was a brief, but strong, supply cycle for the Brisbane CBD in 2016, adding 190,987m² of new stock. However the coming two years will feature far lower supply. The majority of this supply was added to the premium market which grew by 64% over 2016 from 1 William St (75,853m²) and 480 Queen St (54,985m²). These buildings were the first premium additions since the completion of 111 Eagle St in 2012 and brings the premium building stock to 335,470m², still a relatively small 15% of the market. 

In the short term, the return of the refurbished 310 Ann St (18,450m²) will be the only significant addition to the CBD market in 2017. In terms of new construction the hiatus is expected to last unit late 2018/early 2019 when the Shayher Group’s 300 George St is expected to be completed. This hiatus in new supply will be beneficial for the Brisbane market, allowing the improved tenant demand to be translated into improvements in the vacancy levels over the coming 12-18 months.

Tenant demand has continued to improve across the Brisbane CBD in the early months of 2017 with the good levels of enquiry from smaller tenants beginning to broaden into the larger size brackets. Total vacancy for the CBD has reduced from 16.9% as at July 2016 to 15.3% in January 2017 with the highpoint for this cycle now in the past. Although Knight Frank believes there are some one-off/calculation factors which have increased the magnitude of the vacancy rate decline, there is a real sense that the leasing market has turned the corner. 

Following three years of negative net absorption, the Brisbane CBD has recovered over the past 12 months with a total of 94,601m² absorbed according to the PCA survey. This was dominated by the prime market with a total of 152,505m² absorbed, largely due to take-up in the newly completed buildings and solid take-up of associated prime backfill space. In contrast the secondary market saw negative net absorption of 57,904m² as obsolete space was vacated and in many cases also withdrawn from stock. 

While there is definite positivity in the Brisbane CBD leasing market, Knight Frank believes the above figures represent an element of overstatement for the second half of 2017. In part this is due to the complexity of the State Government’s upgrading of their office accommodation, spear-headed by the move to occupy the whole of the newly completed 1 William St. Beyond the buildings to be demolished for the Queens Wharf site, there are a further two buildings which are in the process of being vacated by the State Government. These are 80 Ann St (14,429m²) where the lease to the State expired in February 2017 and Health & Forestry House (26,651m²) 147-163 Charlotte St & 142-160 Mary St which has a lease in place to the State until December 2017. Counting these buildings as fully occupied, as well as 1 William St, overstates the net absorption by circa 40,000m². The underlying net absorption is expected to continue to grow through 2017 with inflows from the Fringe market building. However as the remaining state government buildings are vacated the net absorption and vacancy numbers for 2017 are expected to understate underlying market activity

Brisbane prime gross effective rents have begun to show some improvement after reaching a low-point in January 2016 and remaining stable for much of 2016. Prime gross face rents currently average $729/m², up by 3.3% over the past year. In the same period incentives have fallen slightly from an average of 37% to 36.5%, resulting in gross effective rental growth of 4.1% over the 12 month period. This is the highest level of effective rental growth recorded since April 2012 when the resources boom was in force.

Largely boosted by a better than expected increase in gross face rents, this rate of rental growth is higher than was expected, given the considerable vacancy which remains. However sentiment has clearly turned with the lack of new supply, improving leasing activity and steady influx of tenants from the Fringe having an impact on confidence. Going forward gross effective rental growth is forecast at 3.7% for the coming 12 months. As incentives remain stubbornly high with only marginal falls, the continued improvement to face rents will be the greatest driver of rental growth. In the longer term effective rental growth expectations for the calendar years of 2018—2020 will range between 5.0% and 6.0% per annum. Nevertheless it will be mid-2019 before the effective rent returns to levels seen in late 2009 ($500+/m²), beyond the pre-GFC peak.

Read our latest Brisbane CBD Office Market Overview here