The Brisbane CBD market has been through a tough two years, with falling demand driven by the reduction in commodity prices impacting the mining and agricultural sectors.
Poor white collar employment prospects in this sector together with transport, logistics, professional services and finance has resulted in the Brisbane CBD now the highest vacancy CBD in the country with 343,313 sqm vacant or 15.6%.
Brisbane CBD is looking down the barrel of the next wave of supply, with the expectation of adding 188,000 sqm over the next two years; the outlook for the CBD market fundamentals looks weak for the short to medium term.
Total vacancy for the CBD is now at a record high, according to the most recent Property Council Office Marker Report at 15.6%. While a flight to quality is a usual response to high occupancy Premium vacancy has not surprised by falling to 9.1% while A grade has shown some slight increase to 11.1%. B grade has been the category which has beared the brunt of most of this reshuffle across the CBD now with a vacancy rate of 23.0% despite this period of no new supply. Looking ahead a strong supply schedule for 2015 and 2016 will put further pressure on the high vacancy situation which could result in vacancies reaching levels as high as 18–19%. With no significant improvement in white collar employment growth forecast this year or next coupled with this new wave of development, market fundamentals look to remain skewed over the next couple of years.
This chart showcases the strong decline in office demand across the Brisbane CBD. More discouraging for this market is the prior three periods of negative net supply; withdrawal of stock should have a more positive affect on market conditions and given the supply additions anticipated for 2015 and 2016, the future for the Brisbane CBD office market looks bleak. The 10,354sqm of take up across the premium grade market is quickly eroded by the -28,887sqm across B grade stock and this trend is expected to continue over the next two years as 188,000sqm of new stock is anticipated to enter the market. This high supply will also attract a greater lease incentive which in turn is an opportunity for traditional secondary businesses to relocate to better quality premises. Similarly the lure of quality and affordable accommodation within the CBD may attract tenancies from the fringe market which will have a knock on negative affect for those markets also.
With demand low across the market, face rents have shown some signs of decline. Across most Australian office markets, face rents have shown a prolonged stability while incentive levels show fluctuations which result in the effective rental position showing more volatility. Brisbane CBD however has seen this uncertainty in the face rent during a period of historical highs in incentives. The range in rents achievable are vast however the average prime gross face rent averages $650/sqm in December 2014 which represents a 5.11% fall in the last year and 22.00% down from the peak rate achieved in 2008. The secondary market has shown more consistent decline over the last two years, down 10.75% over this period to the current average of $490/sqm, also still well below the high of $649/sqm achieved during 2008. Incentives across the market remain high, while the average across prime assets is between 32% and 35%, incentives up to 50% has been publicised for new stock which includes fit out as well as rental abatement. The secondary market historically has shown a greater range in incentives, however given the rapid increase in vacancy across the secondary quality grades and the anticipated continued increase, incentives could well reach this same level in the short to medium term.