The Brisbane CBD Office market continues to be plagued by limited demand keeping vacancies high. Across the broader CBD market, take up has been in negative territory for the last two and a half years as the Queensland economy has been hit by the reduction in the mining and agricultural sectors impacting the local employment market.
Luckily for this market has been the negative net supply position which has aided in these vacancy levels not further blowing out. However, given a number of major projects currently under construction; this high supply during a time of limited forecast employment growth could still see recovery of this market still several years off. Face rents have responded accordingly with some reductions occurring after a prolonged stable period as incentives remain high. Encouragingly however has been the investment market, the strong weight of funds has resulting in some minor reductions in yields despite this mismatch in market fundamentals. The Strata market investment levels have not mirrored the broader market with limited turnover despite the historically low interest rate environment. Although the sample size of sales for 2015 is small, the average capital values for strata office has witnessed some minor increases yet still behind the peak in the market of 2012.
The Brisbane CBD office market has been in a two and a half year period of negative net absorption. This reduction in occupied stock has resulted in strong and rapid increases to the total vacancy environment, growing to its current rate of 15.0%. While this has reduced this period from the high of 15.9% in January 2015 this was due to the withdrawal of stock out of the market. Encouragingly for the Brisbane CBD is the anticipated uptick in employment; according to Access Economics, white collar employment over the next five years is expected to grow by 2.1% per annum. This is forecast to be driven by an improvement in the Public Administration, Health Care and Social Assistance and at a lesser rate the Professional, Scientific and Technical Services category. This has moved away from the strong increases which were witnessed in the 2008 to 2012 periods by different sectors including: Agriculture and Mining, Electricity, Gas, Water and Waste Services, Education and Training and Wholesale Trade.
While vacancy has been steadily increasing over the last couple of years there is some evidence of a flight to quality given the significant incentives on offer resulting in a reduction in vacancies for Premium stock. Premium has the lowest vacancy currently 9.3% down from the 14.2% just 12 months ago; while A Grade stock has been on a stable trajectory upward growing from 4.3% in July 2012 to 12.3% currently which now represents over 100,000sqm of vacant stock. B Grade has shown the most rapid increase over the last three years growing from 8.0% in 2012 before peaking last period at 22.6% before reducing in the first half of 2015 at 19.2%, it is this segment of the market which accounts for the majority of vacant space being 155,541sqm is the only grade to of seen significant positive absorption this period. The C and D grade markets represent 32,927sqm and 10,017sqm respectively of vacant space or 15.0% and 16.5%.
Over the past 18 months the Brisbane CBD office market has been in position where new supply additions have been counteracted by withdrawal of stock. This negative net supply position has aided the total office market during this period of waning demand, ensuring that vacancy levels do not exceed 20%. The current size of the Brisbane CBD office market is 2,158,290sqm which is smallest the office market has been since January 2012, looking forward this trend is expected to change with the development pipeline expecting completions over the next year. There are three new developments currently under construction across the CBD and one refurbishment which will enter the market over the next 18 months. The remainder of this year will see the Daisho Site at 180 Ann Street completed adding 57,465sqm of uncommitted supply to the market, together with a small 2,800sqm refurbishment at Riverside Centre. 2016 will see the completion of two new buildings which will add 132,708sqm to the market, of which 80% is pre-commitment which will result in a reshuffle across the CBD and further increases to the vacancy position.
During this period of low demand, driving vacancies up the rental market has been under sizeable pressure resulting in a reduction in face rents while incentives have continued at their prolonged high. Gross Face Rents across the CBD have not recovered back to their pre GFC peak where average rents were achieved at $833/sqm for Prime and $650/sqm in the secondary market. There was some recovery in these rates in 2012 however this signalled the start of the perfect storm of supply additions, waning demand resulting in swift upward momentum in vacancies which pressured gross face rents down and grew incentives up to as much as 50% in some instances. Incentives have stabilised and currently average 35% however gross face rents have reduced 4.29% over the last year to $650/sqm for prime and down 3.9% to $490/sqm in the secondary market.