The Spring Hill office market has been contracting in size over the past few years as residential redevelopment opportunities have been a more attractive option for office owners. Despite the negative take up of space, this reduced supply position has resulted in the vacancy level falling to 15.2% for the total market while the strata market is 11.3%.
A pick up in investment demand has seen some rebound in capital values for the strata market driven, more by the owner occupier market during this time of reduced interest rates. As a result there has been limited movement in the yield position across the Brisbane Fringe market which has bucked the trend seen across the remainder of the east coast investment markets.
The Spring Hill office market has recently improved thanks to withdrawal of stock in the market despite a prolonged period of limited net absorption resulting in current vacancy at 15.2%. The size of the Spring Hill market has reduced in size, now representing 137,635sqm the smallest this market has been since the Property Council has monitored it in 1991; there has been a vast decline from its peak size just two years ago at 165,528sqm. The current vacancy rate has shown a decline from the January 2015 result of 17.5% and the high achieved in January 2014 where vacancy grew to 20.7%. Demand for space has been subdued across the broader Brisbane market with white collar employment growth projections soft, this has been felt in the Spring Hill market with net absorption over the last five years averaging –2,476sqm each six month period. At current the level of occupied stock of 116,739sqm is the second lowest level recorded other than the peak vacancy period of January 2014.
The investment market has shown robust results across most of Australia, a combination of weight of funds, low interest rates and increased investment interest from offshore buyers has resulted in strong yield contraction across major investment markets. Given the uncertainty surrounding the Brisbane office market this has seen limited positive change in yield and this has also flowed through to the Fringe market. Investment yields have a prolonged period of stability and more recently increase off the back of high vacancies and negative sentiment around the leasing market during a time where other east coast markets have tightened to new low yield results. The spread between prime and secondary also has continued to show a wide gap which has also narrowed across the country as investors move up the risk curve during this time of high demand. Currently the prime Fringe market is achieving yields in the range of 7.75% to 8.75% while the secondary market is within the 9.00% to 10.00% range. Given the current low 10 year bond rate of 2.50%, the spread to bond is at its highest level since 2003.
Activity in the strata office Fringe markets has shown a pickup in activity during 2014 due to the increased interest by opportunistic investors capitalising on the historic low interest rates, together with SMSF’s; owner occupier activity continues to be strong despite current competitive leasing environment. Spring Hill results are not dissimilar to the broader Fringe market with $10.53 mill changing hands in 2014 after a strong 2013 period at $10.84 mill, 2015 to July has resulted in $5.39 mill turning over. The change in capital values have shown movement in line with the broader market sentiment in the Brisbane commercial markets reducing to their low in 2014 of $3,838/sqm, 6.9% down on 2013. Encouragingly, 2015 has shown an uptick in capital values growing by 3.4% to $3,969/sqm, despite this improved result there is limited expectation that these rates will continue upward momentum, particularly as the take up, vacancy and rental fundamentals continue to be unaligned.