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 JLL has identified up to 194,000 sqm (equivalent to 9% of stock) which could be withdrawn over the next five years for conversion, refurbishment or demolition.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.

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