19/10/2022

A CHANGING DYNAMIC IN BRISBANE CBD OFFICE

Brisbane’s office market continues to show signs of recovery in net absorption and occupancy rates, assisted by a lack of new supply coming online and more workers returning to traditional office hours. 

Driven by significant population growth, major infrastructure investment, and a 13-year low in unemployment, the immediate future looks bright for our CBD. However, there is still a considerable risk to this outlook. 

A stubbornly high inflation figure and the ongoing conflict in Europe are dampening the outlook to a degree. In addition, the elevated cost of construction materials and the shortage of trades are also significant.

Prime Gross rents have increased by 3.40% year-on-year, but incentives offered remain incredibly high at circa 40%. Vacancy has fallen to 14% across the sector as the uptake of Prime office space continues to strengthen, primarily due to significant pre-committed leases being secured by major tenants.  

New supply will be limited between now and the back end of 2024, with only refurbished space coming available. Brisbane tenants absorbed 44,000m2 of office space from January to July this year, which put our absorption rate well above historical averages. Given the lack of new supply coming online in 2022 and 2023 and the fundamental economic tailwinds at play, demand should remain strong. 

“Despite the ongoing impacts of the pandemic and trend towards greater workplace flexibility, quality office space in Brisbane remains in high demand.” (Jen Williams, PCA)
We have seen subdued sales activity and a slight softening of yields, albeit based on very few recent transactions. As a result, investors are taking a cautious approach until the top end of this interest rate cycle becomes evident. 

The rapidly rising interest rate is putting pressure on many investors. Traditional “set and forget” landlords are faced with the decision to either complete major works to bring their asset up to standard or endure significant vacancy and offer even larger incentives to meet cash-flow requirements as tenants flock to prime offerings. This has led to a significant increase in discussions around value-add and repositioning opportunities as cashed-up investors look for distressed assets to add to their portfolio. 
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Construction headwinds have drawn many developers into refurbishing/repositioning existing assets to keep their pipeline active. The major developers are still in the market for office development sites but are taking a more long-term view regarding their construction schedules and development programs.