_Brisbane CBD office market activity poised to regain normality in 2021

The Brisbane CBD office market is expected to maintain the status quo for the remainder of 2020, but a revival in activity is expected going into 2021, according to Knight Frank.

The latest Knight Frank Brisbane CBD Office Market Report found activity in the market was limited this year due to COVID-19 and the pandemic-induced recession, with both sales and leasing transaction volumes at lower levels, blurring asset values.

The upcoming Queensland election has also contributed to delaying activity, along with the state’s border closures.

Knight Frank Partner and Head of Office Leasing in Queensland Mark McCann said potential normality was expected to return to the market in 2021.

“Leasing activity has been low in 2020 with a reluctance from tenants to make long-term plans causing many occupancy decisions to be deferred,” he said.

“Eighty per cent of leases signed in Brisbane so far this year have been for smaller requirements of under 1000sq m, with the majority of larger companies delaying commitments to any new leases due to uncertainty around the economy and the workplace environment going forward.

“These decisions can’t be deferred indefinitely, however, and we expect that tenant engagement and activity will increase in the new year, with pent-up demand particularly from corporates starting to finalise their future workplace models and size.

“The Queensland election in particular has likely pushed back the revival in activity until the new year, with the market on hold, waiting for the outcome.”

The Knight Frank report found that despite positive net absorption in the first half of 2020 vacancy in Brisbane’s CBD office market increased to 12.9% due to supply additions.

It is expected to stay in the region of 13% to the end of this year with low activity levels and benign supply, before rising past 15% during 2021 due to supply additions with the completion of Midtown Centre coinciding with the expected downsizing tenants handing back space.

Vacancy is expected to remain elevated during 2022 before beginning to see material decreases during 2023, but will likely remain above 10% through to 2024/25, according to the research.

Sublease vacancy is also expected to increase over the coming 12 to 18 months.

Prime and secondary gross effective rents have fallen by 1.8% and 0.9% respectively over the past 12 months. In the main, face rents are being maintained with incentives softening.

Knight Frank Partner, Research and Consulting Jennelle Wilson said Queensland was well positioned among the Australian states to begin the recovery faster.

“Queensland is currently in the fortunate position where many elements of household life have been relatively normal since July,” she said.

“The state also benefits from having a more physically and sectorally diverse economy than its southern counterparts, a high infrastructure spend locked in for the Brisbane region including the $5.4 billion Cross River Rail project, and stable household spending.

“There were also fewer restrictions on activity in the third quarter in Queensland than in New South Wales or Victoria, putting the Queensland economy ahead of the other states in locally generated activity, although the border closures were an additional barrier to deals being completed.”

The Knight Frank Brisbane CBD Office Market Report found restrictions on movement and economic uncertainty had also slowed investment in Brisbane’s CBD office market.

Following record breaking levels of investment in 2019, 2020 is expected to be far lower with only $520 million transacted to date, putting the tally on par with transaction levels seen in 2008 and 2009.

Knight Frank Partner and Head of Capital Markets Queensland Justin Bond said transaction activity in the Brisbane CBD has stalled this year with only a few sales taking place which were largely negotiated in late 2019 and reaching completion during 2020.

“There have been few assets formally offered to the market, but there are at least two off-market assets in negotiation or due diligence which may provide more definitive market direction on the risk acceptance of purchasers.

“The yield band is widening with core assets maintaining a tightening bias given the low cost of funds and demand for low risk.

“Price impacts have been highly divergent. True core property pricing has remained firm, however exposed assets have been hit harder with a difference in price expectations still in place between purchasers and vendors of these assets.”

Despite the slowdown in investment, Justin said the long-term interest in Brisbane as a key investment destination remained with medium to longer term development sites still being contested.

“Brisbane’s demonstration of economic resilience and continued infrastructure spend will be essential to keep the city front of mind with investors, who have increasingly looked at Queensland’s capital in recent years,” he said.

“In recent weeks the Sydney investment market has seen renewed activity after a quiet year to date and Brisbane is now following suit.

“With an abundance of capital in the market, we expect to see increased investment activity in Brisbane through to the end of 2020 and early 2021.”