Brisbane Experiencing Prime Office Market Squeeze

According to CBRE, recentralization and a flight to quality are helping to drive an uptick in Brisbane's prime CBD office market, underpinned by record levels of investment in new development projects.

CBRE is reporting that a series of developments are set to redefine the CBD's traditional boundaries and transform George Street into a new entertainment precinct, including the Queensland Government's Cross River Rail project, which will feature a new underground station at Albert Street; Shayher Group's commercial tower development at 300 George Street; and the $3 billion Queen's Wharf casino development, due for completion in 2024.

Of the $35 billion worth of major projects under way or proposed for the city of Brisbane, a record $15 billion has been allocated to the CBD.

CBRE's Queensland state director, Chris Butters, noted, "This is game changing. Never before has the Brisbane CBD seen this level of investment, with multiple projects underway at the same time."

"This influx of major projects is anticipated to intensify the current themes of recentralization and a flight to quality, which are at the highest levels since the resource boom seven years ago, as occupiers seek activated locations offering amenities for staff, security and quality public transport," Mr. Butters said.

The flight to quality was highlighted by the 21,739sqm of positive net absorption in the six months to July 2018, 90% of which occurred in the prime grade market.

Furthermore, over 80% of the 150,000sqm in leasing transactions completed year to date have involved prime grade space, most notably a pre-commitment by Suncorp to a new 39,700sqm headquarters at 80 Ann Street, the Department of Veteran Affairs lease at 480 Queen Street, Westpac's commitment to GPT's Riverside Centre on Eagle Street and WeWork's lease at 192 Ann Street - spurring the expanding co-working sector.

This has had a notable impact on vacancy rates, with CBRE forecasting that the prime grade vacancy will reach 9.5% by year's end - the lowest rate in a decade.

Improved business conditions are also aiding the city's recovery, with CBRE forecasting 1.9% white-collar employment growth this year - the highest level since 2014. Further, CBRE is anticipating the average annual white-collar employment growth rate to almost double, from 0.7% over the past five-year period, to 1.2% over the next.

As vacancy in the prime grade office market continues to tighten, Mr. Butters said the availability of contiguous space options was becoming increasingly constrained. As at October, the CBRE leasing guide reports less than 3,000sqm of contiguous premium space was available.

While demand is rising and vacancy rates are low, the future supply pipeline remains remarkably thin.   

The only developments under construction are The Annex, a 7,200sqm boutique workplace at 12 Creek Street, Shayher Group's commercial tower at 300 George Street and Suncorp's head office at 80 Ann Street HQ. These projects have a combined NLA of circa 100,000sqm.

In comparison, the previous five-year period saw double the amount of space developed, in an environment underpinned by a record high vacancy and record low employment growth.

Mr. Butters commented, "As metro markets continue to tighten and tenants of all grades jostle for prime opportunities, tenant advisors are becoming increasingly wary of the changing conditions.

"Several tenants have recently been unable to secure their preferred locations and premises size, resulting in suboptimal outcomes, for instance, non-contiguous space and secondary locations."

Mr. Butters suggested that, to secure the right location, occupiers should be reviewing lease strategies around three to four years from expiry.

"The lack of early consideration of accommodation strategy will become problematic for tenants with upcoming expiries in a tightening prime market," Mr. Butters said.