The Brisbane market has gone through a number of years of economic uncertainty putting pressure on employment notably in the mining/agricultural sectors and associated industries resulting negatively on the office markets.
Brisbane CBD has been hit hard resulting in a new high in vacancies during 2015 and increases in market incentives, the Fringe market too has been affected albeit at a lesser rate. The strata office market remained strong during this period, with high owner occupation levels and capital values maintaining despite mixed market fundamentals.
The broader Brisbane Fringe office market has been performing in line with the Brisbane CBD market with high levels of negative take up and new highs achieved in vacancies. The Milton office market is 234,373 sqm in total, of which currently 46,170 sqm is vacant, this high 19.7% vacancy rate attributed to the -11,180 sqm absorption recorded in the year to July 2015. This tenant loss has been feature over the last two years in the Milton market resulting in this swift uplift to the vacancy rate from 8.0% in 2012. Toowong is significantly smaller in size, the office market accounting for 81,183 sqm and has not seen any supply additions since 2007, vacancy in this location is currently 10.4% which has remained relatively stable over the past three years.
Brisbane CBD vacancy is currently recorded at 15.0% (a slight decline in the last 6 months) which has put a toll on the rental market with incentives reported as high as 50%, the total Brisbane Fringe market with vacancy also at a high at 12.6% has attracted significant rental discounting. Across this market, prime face rents have remained reasonably constant over the last four years currently achieving a gross rent of $510/sqm, while the secondary market has resulted in some tightening in rents over the same period to currently average $415/sqm. Incentives are also prevalent in this market, albeit not to the same extent to the CBD, currently averaging between 30% and 35%. The outlook for rents is one of stability; any improvement in the rental situation would need to be accompanied by a strong uptick in demand putting absorption levels positive to reduce the vacancy position. For the strata market however, given the strong owner occupation, those smaller tenancies which do enter the market attract a lower incentive level or around 10% to 15% on a three year lease and generally taken as rental abatement.
During 2014 there was $7.39 mill and $7.33 mill change hands for Toowong and Milton respectively, representing a 65.3% and 270.9% increase off 2013 results. During the first five months of 2015 there has only been three sales recorded including two larger sales in Milton and one smaller $214,500 transaction for Toowong. The capital values for this region have remained relatively constant over this period, with latest increase in Toowong more likely due to the limited evidence pool than a significant change in trends. Toowong rates look to average slightly above the Milton average with the 2014 result $4,103/sqm while the Milton rate of $3,878/sqm for 2015 is consistent with the value achieved during 2014 of $3,730/sqm. There is limited expectation that these rates will see movement over the short term, particularly as the take up, vacancy and rental fundamentals continue to be unaligned.
Of this space, vacancy of 4,524 sqm has been identified or 8.6%, well below the total office market which had a combined vacancy of 15.7% for the Western Fringe. The Toowong market (including Taringa) is home to 22,184 sqm spread across nine buildings with a very limited vacancy factor of 3.5%, however Milton’s strata office component is 30,232 sqm across 15 buildings (including Paddington and Auchenflower). Milton currently is witnessing a higher proportion of vacant space with 3,745 sqm vacant or a vacancy rate of 12.4%. This high vacancy rate in Milton has been driven by a few buildings with over 20% vacancy including 19 Kilroe Street (41.5%), 20 Douglas Street (34.0%), 5 Gardner Close (31.0%) and 7 Camford Street (23.9%).
While vacancies in Milton have been driven by a handful of properties with a high proportion of vacancy, there are also a number of quality assets which have no vacancy at all. Properties such as 9 Camford Street, 11 Camford Street, 10 Dorsey Street all within the sought after Camford Square development, the historic terraces at 249 Coronation Drive and the larger two unit property at 15 Lang Parade all in Milton are indicative of successful strata properties which consistently have close to full occupation.
The strata office market has witnessed some improvement in investment turnover during 2014 and beyond however there has been a significant increase in investment on the retail side which double investment in the strata market. During 2013 there was $8.25 million that changed hands across six transactions, this level was not repeated in 2014 where $2.05 million was transacted. Quality or premium type assets have been sought after by investors achieving capital values in the region of $17,000/ sqm, these properties are typically those well located on Park Road and have secure long term restaurant leases. These highs exceed those capital values achievable within the CBD, highlighting the confidence in this location. Prime retail assets however are more reasonably priced in the $8,000/sqm to $12,000/sqm range and are also strongly food or convenience driven tenancies in locations such as Sherwood Road; the more secondary located or in quality asset average $4,500/sqm to $8,250/sqm.
Rents achievable vary considering the quality of asset, as discussed those premium assets in terms of location, size, access etc; demand rents up in the $800/ sqm to $1,050/sqm gross face range. Prime assets are slightly less in the $550/sqm to $900/sqm range while those less attractive assets without the same quality characteristics or have limited pedestrian achieve rates closer to $250/sqm to $650/sqm. Some more recent leases include: 12 Park Road, Milton, the 32 sqm secondary property leased at $470/sqm gross in early 2015. Also this year, the 130 sqm prime property at 20 Latrobe Terrace, Paddington was leased for $577/sqm gross while the latest premium asset reported late last year at 11/20 Park Road Milton leased at a rate of $1,333/sqm for 117 sqm.