The tide has turned (Rapidly) for the Brisbane office marketOctober 15, 2012 / By
Until recently, the outlook for the Brisbane office market appeared strong. However, things have changed rapidly over recent months and the demand environment now appears challenging for at least the next 12 months. This dramatic turnaround reflects three key factors: a much quicker and more significant reduction than expected in the impetus to tenant demand from the resources sector; continued fragile business sentiment across other sectors; and the impact of State Government downsizing.
The impetus to white collar employment from resources projects was always expected to slow over the next few years as the large number of committed projects moves into construction and the flow of new projects slows. Previously, this was expected to occur gradually over the next few years and the stimulus that the construction projects would give the broader Queensland economy would boost business confidence in other sectors and offset some of the declining impetus to net absorption from the resources sector.
The reality has been that sharper-than-expected declines in commodity prices, blowouts in project costs and shareholder pressure on resources companies to pay dividends rather than invest have all led to the postponement of uncommitted future projects sooner than expected and to the re-assessment of some existing operations (particularly coking coal). With some resource and engineering firms already offering sub-lease spaces to the market, the resources sector impetus has gone into reverse.
While the cooling resources sector should theoretically reduce some cost pressures in the economy and put downward pressure on the Australian dollar, this has not occurred yet and general business sentiment has deteriorated recently rather than improve. Consequently, other sectors are not likely to pick up much of the slack from the resources sector over the next 12 months.
The Queensland public sector grew enormously over the past decade and has been a significant driver of tenant demand over that period. A new conservative State Government elected in early 2012 has recently instigated public sector job cuts totaling around 14,000 across the state in order to address high budget deficits and state debt. The State Government occupies around 400,000 sqm of space in the Brisbane CBD and the job cuts have prompted a decision to roll staff out of commercially leased space and consolidate accommodation within government-owned buildings. The State has recently reportedly identified at least 40,000 sqm of commercially leased space that it will look to sub-lease or relinquish on lease expiry over the next few years. This space is almost entirely secondary stock and as a result we expect a two-tiered market to rapidly emerge between the prime and secondary space markets.
The silver lining for the market is that there is virtually no uncommitted new supply due to hit the market until at least late-2015 and this should help the market bounce back as demand recovers from 2014 onwards. Indeed, there is now a risk that the slow near-term demand outlook further delays the next wave of construction, which could work well for existing assets around the 2015 period and see a normalisation in incentive levels drive strong effective rental growth.
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