The Queensland economy is currently undergoing a difficult transition away from the resource sector towards more broad based growth. At the same time the Brisbane office market is struggling with a difficult combination of historically high vacancy combined with a large development pipeline. What are the long term prospects for a market with such characteristics?
Rather than compare Brisbane to other resource based cities I’m going to look internationally to another city which also experienced a similar situation. In Amsterdam demand fell off dramatically after the dot com crash and at the same time new developments were in the pipeline.
Vacancy in Amsterdam hit a low of just over 2% in 2000 and then consistently increased to 22% in mid-2005. Not all of the available stock was viewed as attractive to tenants due to quality and / or location and therefore a significant proportion of stock ended up vacant for several years. Structural vacancy was the term given to stock which was long term vacant and unlikely to be re-leased in its current fit out. This is a hangover from which Amsterdam is still recovering – in the ten years following the vacancy peak, prime face rents have only grown by 7.8% (or 0.8% p.a.) and vacancy today is 15.5%. ‘It isn’t over supplied it’s under demolished’ was used to describe the Amsterdam situation.
Vacancy Rates Brisbane and Amsterdam
Source: JLL Research
There are several similarities to Brisbane’s current situation. In 2007 vacancy reached a low of 0.2%, has risen to 15.9% in 1Q15, and is expected to peak at just over 20% in 2016. Tenants are taking advantage of the current soft leasing market and are choosing to upgrade their office space at highly attractive rents. This is leaving behind vacant secondary space – already over 1 metre in every 5 metres of secondary space is vacant and this proportion is only likely to increase. JLL recently undertook an exercise to examine the vacant stock and there is a significant proportion which could already be classed as structurally or permanently vacant.
There are a few reasons why Brisbane may not follow in Amsterdam’s footsteps of limited rental growth for a decade:
- Withdrawals of office space are becoming an increasingly important part of the puzzle. JLL has identified up to 194,000 sqm (equivalent to 9% of stock) which could be withdrawn over the next five years for conversion, refurbishment or demolition.
- Policy is supporting conversion to other uses. Brisbane City council recently announced a discount to the infrastructure levy for student accommodation (similar to the one for 4 or 5 star hotels which already exists).
- The Queensland economy is forecast to return to stronger growth over the next few years which should boost office space demand.
Brisbane is definitely a market which is suffering from an oversupply. Whether it could be classed as under demolished is a different question, however, we expect that the secondary market in Brisbane will definitely benefit in the longer term from an increasing trend of withdrawals and conversions.
More on 'Office' in 'Australia'
- Perth CBD’s race to net zero office spacesSeptember 24, 2024
- Impact of the 5th cash rate cycle on Australian office sectorApril 19, 2024
- All play in Melbourne CBDApril 2, 2024
- Brisbane’s construction “dilemma”December 12, 2023
- Sydney CBD office: flood of supply, then droughtOctober 31, 2023
