Inner Brisbane (CBD & Fringe) Office Market Update Spring 2019
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Inner Brisbane (CBD & Fringe) Office Market Update Spring 2019
Market Overview • Rental rates have increased over the past year.
Rents for B-grade properties have increased most
Key Influences
This paper reports on the Inner Brisbane office market significantly, with owners having been forced to
(defined to include the CBD and Fringe markets). improve building amenity to be competitive in the Cash Rate and Government Bond Rate
market and to meet tenant expectations.
• The Inner Brisbane office market is performing well, The low cost of debt and low returns on government bonds drive investor demand for
with vacancy declining, rental rates increasing and • The Inner Brisbane investment market had a strong commercial property. The official cash rate is likely to undergo another two cuts and bonds
yields tightening over the past year. 2018, with the second highest volume of sales rates are expected to remain at low levels over the remainder of 2019 and beyond.
recorded on a per annum basis (only behind 2013).
• The Inner Brisbane vacancy rate has declined Inflation adjusted returns are
Activity in 2019 remains strong.
considerably over the past three years. The stronger for property than other asset
reduction in vacancy has recently been the result of • Yields have tightened over the past year. Offshore classes (such as bonds and equities)
investors have been setting new yield benchmarks
Past 5 years Next 5 years
stronger leasing demand, particularly from the State meaning investors are likely to
Government, flexible office space providers and firms and have been particularly active in the CBD market. increase their allocation of property Cash Rate: 1.87% Cash Rate: 1.33%
involved in major projects being constructed across • There has been a negative reaction to the new Foreign
within portfolios and decrease their
Brisbane. allocations towards bonds, which Bond Rate: 2.81% Bond Rate: 1.65%
Land Tax Surcharge by foreign owners. However, we
currently have a negative net return if
• There is a large supply pipeline for the Inner Brisbane expect that demand will continue from these buyers
you hold the bond to maturity.
office market, with the majority of supply proposed for given the fundaments for foreign investment demand
the Urban Renewal sub-locale of the Fringe market. in Australia remain positive.
Business Confidence
Key Confidence in the corporate sector influences tenant
decisions to relocate, expand or contract. Business Past 5 Next 5
Indicators Total Vacancy 12.11% confidence is currently weak and is expected to
years years
Incentive 30% - 45% Urban remain weak over the coming two years, largely due
to concerns surrounding global economic conditions. 4.52 Index 1.32 Index
Rent $525 - $650 Renewal This is expected to keep corporate Australia in a
Points Points
Yield 5.50% - 6.75% phase of cost-cutting.
Total Vacancy 15.88%
Spring Incentive 35% - 45%
Employment
Rent $450 - $575
Milton Hill Yield 6.25% - 7.25% Public Admin & Safety Growth in white-collar employment boosts demand
for office space. The number of persons employed
Professional, Scientific & Technical
in the core white-collar industries across Brisbane
Total Vacancy 11.85% Finance & Insurance is expected to increase by circa 69,100 persons
CBD Incentive 30% - 40%
Admin & Support Services between 2018 and 2023.
Rent $625 - $875
Total Vacancy 17.46% Mining
Yield 5.00% - 6.25% The number of persons employed in
Incentive 35% - 45% Information Media & Telecommunications
White Collar industries is forecast to
Rent $450 - $575
Toowong Yield 6.25% - 7.25%
Inner South Rental, Hiring & Real Estate
0 5,000 10,000 15,000 20,000
increase by 21.36% between 2018 and
Persons 2023 in Brisbane
Sources:
RBA (Cash Rate and Bond Rate)
IBISWorld (Business Confidence)
BIS Oxford Economics (Employment)
Total Vacancy 13.27% Total Vacancy 12.98%
Notes:
Incentive 35% - 45% Incentive 30% - 40% Cash Rate and Bond Rate figures are five-year annual averages. The past five year figures represents the period from 2014 to 2018 (calendar years)
Rent $450 - $550 Rent $525 - $625 and the next five year figures is for the 2019 to 2023 period.
Business Confidence is a five-year annual average. The past five year figure represents the period from 2015 to 2019 (financial years) and the next
Yield 6.50% - 7.25% Yield 5.50% - 6.75% five year average is for the 2020 to 2024 period.
Employment data is for the Brisbane Region and includes the number of persons employed in the industry.
Source: Property Council of Australia (Vacancy Rate – as at July 2019) & m3property Research (Avg Prime Gross Face Rents, Yields & Incentives – as
at June 2019)
| Page 2 Page 3 | Inner Brisbane Office Market Update
Leasing Demand Some examples of new providers in Brisbane include
major international chain WeWork (which now has three
The boundary between the CBD & Fringe is blurred Tenants are reducing their footprint
Following the trend of tenants moving from the CBD to Another trend that is occuring alongside tenants choosing
Leasing activity has strengthened over the past year, locations and circa 15,000 square metres of space in Inner to renew their leases is the reduction of the tenant’s
the Fringe (circa 2013-2015) and then the reversal of this
as evidenced by net absorption figures. The State Brisbane), Hub Australia, Christie Offices and Victory footprint. A number of factors are contribting to this trend,
trend over the past few years, there now appears to be no
Government has been a key absorber of space, as have Offices. including:
clear trend in terms of which direction large tenants are
co-working and other flexible office space providers and
Flexible office space providers typically seek locations that moving (although smaller firms still appear to be showing • Growth in Activity Based Working;
construction and engineering firms.
are close to public transport, often in character/heritage a preference for the CBD).
The public sector workforce continues to grow buildings, with high-quality fit-out, large floor plates and • increased flexibiltiy in employee working arrangements
It is our view that parts of the Fringe market are becoming, (i.e. staff working remotely);
long-lease terms.
m3property have tracked the relationship between State in a way, an extension of the CBD market. This is
Government public sector employment and net absorption We expect that more space will be absorbed by flexible particularly for parts of the Urban Renewal and Inner • Firms choosing to consolidate multiple offices; and
for a number of years. There is a moderately strong positive office space providers over the short-term. However, South markets which will benefit from new public transport • Growth in flexible working space options (which is
correlation between the two factors, as demonstrated by demand is starting to show signs of slowing, with active stations following the completion of the Cross River Rail providing organisiations with the ability to expand and
the following chart. space requirements reducing and some requirements project in 2025. contract space requirements as required).
being put on hold (source: Property Daily).
New development in the Fringe also often has the Some current examples of this trend are detailed below:
Public Sector Employment vs Inner
Major infrastructure projects driving office demand drawcard of higher-quality surrounding amenities, with
Brisbane Net Absorption • Arrow Energy is close to re-signing at 111 Eagle
140,000 m² 14% new development often part of mixed-use retail, residential
Grow th in Public Sector Workforce
Construction and engineering companies have increased Street, however, is expected to downsize by 1,250
120,000 m² 12% and entertainment precincts.
100,000 m² 10% their presence in the Brisbane office market. There are square metres.
80,000 m² 8% numerous examples of companies contracted on the major Lease renewals are increasing
Net Absorption
• Shell re-signed at 275 George Street, however,
60,000 m² 6% projects underway across Brisbane increasing their office
After a number of years of the ‘flight to quality’ story, we are downsized by 1,300 square metres.
40,000 m² 4% footprint or with a current requirement for increased space
20,000 m² 2% now starting to see the winds of change with an increase
to cater for new projects. Some examples of this include: • Cardno re-signed at 515 St Pauls Terrace in Fortitude
0 m² 0% in the number of lease renewals, as a proportion of total
Valley, however, downsized by 1,755 square metres.
-20,000 m² -2% • Multiplex Constructions – has a requirement in the leases. Renewing a lease is a prime example of corporate
-40,000 m² -4% market for 1,200 to 1,500 square metres of space firms trying to cut costs in a time of weaker business • Insurance Group Australia is close to re-signing at 189
Net Absorption
-60,000 m² -6%
Public Sector FTE Workforce Growth after being appointed as the Head Contractor for the confidence and conditions. Grey Street in South Brisbane, however, is expected
-80,000 m² -8%
Queen’s Wharf Development. Our analysis of a sample of leases across the Inner to downsize by 1,780 square metres.
• Transurban – recently signed at 300 George Street, Brisbane market shows that lease renewals increased
Financial Year
Source: Property Council of Australia, Qld Government, m3property doubling their floor space. Transurban are currently from 13% (as a proportion of total leases) in 2017, to 18%
developing the Logan Motorway Enhancement and in 2018, and circa 30% for leases struck in 2019 to date.
The positive correlation between public sector employment
operate six roads / tunnels across Brisbane. During the period of ‘flight to quality’, it was common for
and net absorption is logical. When the economy is
strengthening, it is both likely that the public service will • CPB Consortium – has leased 8,070 square metres of tenants to receive an incentive by way of new fit-out.
be growing and also that demand for office space will be space in Milton. CPB was the winning bidder for the For these tenants, who may now be approaching lease
stronger due to firms looking to expand or diversify their Cross River Rail project. expiry, it is likely that their current fit-out is in an adequate
services. The relationship also highlights how sensitive the condition and still has residual value. Adding to this the
Brisbane office market is to increases or decreases in the down time and costs involved in moving offices, as well
footprint of the public sector. as the tenant’s current ability to negotiate an incentive in
the form of a rental abatement that is comparable to what
The State Government was extremely active in the is being provided on new leases, these tenants now have
Brisbane office market over the past year signing a number less inclination to move.
of leases as well as lease renewals.
Flexible office space providers continue to expand
Flexible office space providers have continued to expand
their presence in Brisbane, and this has been a key
contributing factor to net absorption and declining vacancy
over the past 18 months (particularly given the space
absorbed by these firms has been through new space
requirements, i.e. leaving no backfill space). Co-working is a type of flexible workspace that allows the leasing of
desks or private offices on a flexible basis.
m3property Valuation: 201 Charlotte Street, Brisbane
| Page 4 Page 5 | Inner Brisbane Office Market Update
Vacancy Projects that are partially or fully pre-committed but yet to
start construction include: 80,000
Inner Brisbane Supply Pipeline
2019 2020 2021 2022 DA DA Approved / DA Subm itted Mooted
The CBD, Milton, Spring Hill and Urban Renewal precincts • 470 St Pauls Terrace, Fortitude Valley (‘Jubilee Place’ 70,000 Approve
Net Lettable Area (m2)
saw a decline in vacancy over the past six months. The Development) - circa 45% committed to Watpcac and 60,000
d
w ith pre-
Inner Brisbane vacancy rate declined 131 basis points IWG (Regus). com mit
50,000
over the six months to be 12.55% as at June 2019. m ent
• 11 Breakfast Creek Road, Newstead - circa 15% 40,000
Over the past 12 months, a key factor behind the decline in committed to John Holland.
30,000
vacant space in the CBD and some Fringe sub-locales has
• 152 Wharf Street, Spring Hill - reported to be 100% 20,000
been the expansion of co-working / flexible office space committed to the ATO. Construction is expected to
providers in the Brisbane market. Other key contributing 10,000
commence in the near-term with the development
factors include stock withdrawal, the expansion of the likely to be completed in 2021. -
State Government workforce and space taken up by firms
There are a large number of projects with approval or
contracted to some of the major projects across Brisbane,.
mooted for development over the longer term, however
Supply these projects are unlikely to proceed to construction
unless they receive a significant pre-commitment. In
The Inner Brisbane supply pipeline has grown considerably saying this, there are some large space requirements
and now includes over 25 projects at various stages of in the market that could trigger the development of new CBD
the construction and planning process. Projects under stock. Major requirements include Sunsuper (13,000 to Fringe
construction include: 15,000 square metres), Commonwealth Department of
Human Services (35,000 square metres) and potentially Source: Property Council of Australia, BCC PDOnline, m3property Research
• 300 George Street, CBD - circa 7% committed to
Transurban. Virgin Australia (8,000 square metres plus).
• The Annex, CBD - no known commitments. The strong investment market and significant yield
compression has allowed new development to take shape,
Rental Market Typical ranges for gross face rents as at the September
quarter 2019 are shown below.
• Mid Town Centre, CBD - circa 48% committed to Rio
despite an extended period of subdued rental growth. It is Average gross face rents have increased modestly over
Tinto. Grade Avg. Rent Range Avg. Incentive Range
expected that the Urban Renewal precinct will contribute the past year. Notably, the largest increase has been CBD Premium $810 - $875 30% - 40%
• 80 Ann Street, CBD - circa 66% committed to Suncorp. significantly to new supply over the medium-term. The for B-grade tenancies in the CBD, with average rents CBD A-grade $625 - $795 30% - 40%
• The Eminence, Fortitude Valley - circa 57% committed economic rent for new development in this precinct is increasing 4.55% over the year to September for this part CBD B-grade $525 - $650 35% - 45%
to Pellegrino and Mosaic. currently between $685 - $700 gross, in context of market- of the market. Fringe A-grade $500 - $650 30% - 45%
led incentives of circa 40%. Source: m3property Research
Inner Brisbane Gross Face Rental Rates
Inner Brisbane Vacancy Rate $1,000
30%
CBD $750
Inner South
$/m²
25% Milton $500
Spring Hill
Toowong
Urban Renewal
$250
20%
$-
Sep-99
Sep-01
Sep-03
Sep-05
Sep-07
Sep-09
Sep-11
Sep-13
Sep-15
Sep-17
Sep-19
15%
CBD Premium CBD A-grade
10%
CBD B-grade Fringe A-grade
Source: m3property Research
5%
Rental growth in the CBD’s B-grade market is partly a result
of a number of buildings undergoing refurbishment works
0% or improvements to end-of-trip facilities and amenities.
Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19
Another factor is the high average incentive on offer, which
is a drawcard for small Fringe and Suburban firms to move
Source: Property Council of Australia, m3property to the CBD.
m3property Valuation: Jubilee Place, Fortitude Valley Development
| Page 6 Page 7 | Inner Brisbane Office Market Update
Investment Market The following chart shows the spread between the 10-
year government bond rate and long-term average yields
Outlook • The level of impact will depend upon the existing lease
structure in place, as any increase in outgoings can
The investment market continues to perform strongly. and current yields. The difference between the long-term Investment Market potentially be recovered from the tenant. Ultimately
During 2018 there was $2.8 billion of office buildings average and current spread between yields and the bond this additional cost will be passed onto the tenant,
• Yields are expected to tighten further during
sold (sales over $5 million) in the Inner Brisbane market. rate currently ranges between 146 and 190 percentage impacting business confidence and further cost
the coming 12 months as the bond rate remains
During 2019 to date, there has been circa $1.45 billion of points, indicating the possibility of yields declining further cutting by corporations. Moreover, It is difficult to
at historically low levels and the spread between
transactions. to be more in-line with the long-term average. predict how much (if at all) this additional cost will
Brisbane and Sydney, Melbourne and offshore yields
impact or disrupt rental growth going forward until
continues to encourage investment in the Brisbane
Inner Brisbane Office Sales Yield and 10-Year Government Bond Rate existing leases expire and new deals are negotiated.
$4.0 6% office market. Following tightening over the next 6 to
CBD Fringe
Billions
5% 12 months, we then expect yields to stabilise, however Supply
$3.0 5.18% 5.18% at the lower level.
4% • Supply will remain pre-commitment driven.
4.43%
4.18% • The impact that the new Foreign Land Tax
$2.0 3% 3.72% 3.53% • The next wave of commercial supply will, more-
Surcharge will have on investment demand is yet
2% 2.80% than-ever, incorporate amenity, environmental
2.28% to be fully determined. The initial reaction has been
$1.0 considerations, wellness and a community
1% negative, however, with the State Government due to
offering. This trend will be driven by tenants and will
$0.0 0% release its ex gratia relief guidelines over the coming
encourage development in the Fringe sub-locales
CBD CBD A-grade CBD B-grade Fringe A- weeks, this will hopefully provide more certainty
where there are larger land holdings available for
Premium grade regarding the Surcharge.
Current Spread: 10 yr-government bond rate and yield development at a more affordable cost to developers.
Source: m3property Research
20-yr Avg Spread: 10-yr government bond rate and • m3property expect that the fundamentals of Australia’s
yield Leasing Market
Note: Sales ending August 2019 stable policy and economic environment, the relatively
Source: BIS Oxford Economics, m3property Research
higher yields on offer (compared to what is available • The vacancy rate is forecast to increase to circa
Yields have continued to tighten, and it is our view that 13.5% by the end of 2019. This increase will be the
There is a strong positive relationship between 10-year offshore) and the low value of the Australian Dollar will
they are likely to tighten further over the coming six to 12 result of the completion of 300 George Street later this
bond yields and prime IRRs in the major property sectors. continue to work in the favour of foreign investor
months. Over the short-term, property yields are expected year. Vacancy is then forecast to trend downwards to
For prime CBD office IRRs, when a six-month lag is demand despite the introduction of the Surcharge.
to remain more attractive than some of the other major be circa 11% to 11.5% by the end of 2021.
factored-in, the relationship is even stronger. The spread • Furthermore, given the new Foreign Land Tax
asset classes (such as bonds and equities) and we
between prime property yields and 10-year bonds is Surcharge applies to trusts, companies or individual • Rents are forecast to continue to nudge upwards
expect that this will result in further investment demand for
currently close to its maximum differential that it has been with at least 50% foreign ownership, we expect that over the short-term.
property, thus pushing yields down further. Click here for
over the past six years. acquisitions made via joint ventures between
m3property’s recent report on yield re-rating. • Incentives are entrenched in the Brisbane office
Foreign investors have driven yield compression domestic and foreign companies will increase. market nowadays and we don’t expect this to change
Inner Brisbane Commercial Yields
• The increase in Land Tax rates (applicable to domestic drastically. Whilst we expect they will trend downwards
10% One trend in the investment market has been the strong
9% and foreign buyers) will impact capital values over over the medium-term, we expect that they will stabilise
presence of foreign investment groups in the CBD,
8% the short term. when reaching around the 25% mark.
yet a weaker presence in the Fringe. Since mid-2017,
7%
6%
foreign investment groups have accounted for circa two
5% thirds of CBD sales that have transacted at yields of sub Inner Brisbane Market Balance
150,000 18%
6%. Foreign investors are assisting in driving the yield
Net Supply and Absorption (m2)
4% 10 Year Govt Bond Rate Forecast
CBD Premium
3% compression, having set new benchmarks on a number
CBD A-grade 100,000 12%
2% CBD B-grade of acquisitions. Examples of this are Rockworth Capital
Fringe A-grade
Vacancy Rate
1%
Partners’ acquisition of 100 Edward Street at a yield of
0% 50,000 6%
5.61% for a secondary-grade asset and M&G Real Estate’s
50% acquisition of 80 Ann Street at a yield of 5.00%.
0 0%
Source: BIS Oxford Economics, m3property Research The introduction of the new Foreign Land Tax Surcharge
Note: 10-year government bond rate shows end of period. has the potential to deter some foreign investment -50,000 -6%
Sep-19 forecast.
in Queensland. However, we expect that Australia’s
Analysis by m3property Research shows a strong positive
relatively stable policy and economic environment, the -100,000 -12%
correlation between 10-year bonds and prime yields. The
comparatively higher yields on offer in Australia (and
falling 10-year bond yield is generally associated with a
Brisbane relative to Sydney and Melbourne) and the value
fall in yields and this relationship typically exhibits a three- Net Supply Net Absorption Vacancy Rate
of the Australian Dollar will still encourage foreign groups
to six-month lag from when the bond rate falls before the
to purchase assets in Queensland, particularly once there Source: Property Council of Australia, m3property Research
adjustment is shown in office yields.
is more certainty around the Surcharge.
| Page 8 Page 9 | Inner Brisbane Office Market Update
Key Contacts
Casey Robinson Michael Coverdale
Director - Research Director
Qld | +61 7 3620 7906 Qld | +61 7 3620 7907
casey.robinson@m3property.com.au michael.coverdale@m3property.com.au
Ross Perkins Timothy Webster
Managing Director Valuation Analyst
Qld | +61 7 3620 7901 Qld | +61 7 3620 7903
ross.perkins@m3property.com.au timothy.webster@m3property.com.au
m3property.com.au /m3property
DISCLAIMER © m3property Australia. Liability limited by a scheme approved under Professional Standards Legislation. This report is for information
purposes only and has been derived, in part, from sources other than m3property and does not constitute advice. In passing on this information,
m3property makes no representation that any information or assumption contained in this material is accurate or complete. To the extent that this material
contains any statement as to the future, it is simply an estimate or opinion based on information available to m3property at that time and contains
m3property
assumptions, whichStrategists
may be incorrect. m3property makes no representation that any such statements are, or will be, accurate. Any unauthorised use10 or
redistribution of part, or all, of this report is prohibited.
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