The divergence in performance of the prime and secondary space market in Brisbane is likely to initiate significant redevelopment activity over the next few years. While there is high underlying demand for prime space (as evidenced by high pre-commitment activity), the opposite is true for the secondary market.
In Q4/2012, secondary Brisbane CBD vacancy was 12.7%, more than double the 6.3% ten year average. This is likely to increase further over the next twelve months. A significant amount of project space is likely to be surrendered by infrastructure and mining groups. Additionally, the state government is expected to reduce its office footprint further, in-line with continued public sector contraction. Some estimates suggests that the state government will relinquish a further 40,000 sqm of space (mainly secondary) over the next year.
With higher secondary vacancy, an increasing amount of second grade stock is becoming redundant, particularly given tenants’ apparent underlying preference for prime space. As at Q4/2012, around one in six secondary grade CBD buildings were more than 30% vacant. The majority of this vacancy is unlikely to be taken-up over the next 12-18 months without upgrading the space through significant capital expenditure. As the stock becomes redundant, owners will need re-evaluate their assets and determine if there is a higher and better use. As such we expect strong redevelopment activity in the next few years.
We’ve already begun to see this activity through the redevelopment of the Lennons Plaza Offices on Queen Street in mid-2012. The secondary grade property, which initially comprised office and hotel accommodation, was acquired by SilverNeedle Hospitality for a full hotel conversion. The development will open in 2014 and will be one of the largest recent hotel redevelopment projects in Australia.
Despite the redevelopment of Lennons Plaza for hotel use, short term accommodation space is still very limited in Brisbane. The local and state government are trying to address this shortage through favourable planning structures, such as the moratorium being offered by the Brisbane City Council on infrastructure charges in order to encourage construction. Along with rising room rates and high occupancy, favourable planning regulations towards more hotel accommodation may improve hotel redevelopment feasibility in the next few years.
Redundant secondary space can also potentially be converted into residential/mixed use sites as the residential cycle gains traction, or upgraded into higher quality office accommodation. This is what occurred in the early 1990’s, when vacancy reached all-time highs, peaking at 14.3% in 1992. While vacancy has not reached this level, the significant amount of un-leasable vacant secondary space gives rise to an environment conducive to redevelopment. The question is whether existing owners (or new entrants) are willing to take on the development risks, or whether they hold out until the secondary office space market recovers.
More on 'Office' in 'Australia'
- 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
- How does Australia approach the “S” in ESG?October 5, 2023
