_The competitive tension between the Brisbane CBD and Fringe is on the verge of changing

Net Absorption will remain negative H1 2018, vacancy to peak mid-2018

Net absorption is expected to remain negative in the Fringe for the first half of 2018. Despite significant tenant moves into the Fringe market—ie Aurizon (11,691sqm), the overall tenant movement will be out of the Fringe. 

Departures from the Fringe in the first half of 2018 are dominated by Origin Energy’s relocation in to the CBD, leaving at least 25,000sqm of backfill space in Milton. Additionally the proposed July 2018 demolition of the Landcentre at Woolloongabba will cause c16,000sqm of State Government tenancies to relocate into the CBD.

From H2 2018 onward the net absorption is expected to return to positive as the Fringe regains some of its competitive rental advantage against the CBD in an environment where tenant demand is lifting.

A number of IT, media and engineering companies are actively seeking space

During the past 18 months the Fringe struggled to attract and retain both smaller and large tenants, with many opting for the CBD due to the relatively attractive rental terms that were on offer. The only notable exception has been for newly developed space, where these Fringe buildings have drawn tenants (Aurizon, Aurecon, plus a rumoured further two large imminent commitments).

Demand is showing sustained improvement in the CBD, triggering effective rental growth, while Fringe effective rents remain flat as incentives reached new heights. Therefore, the competitive tension between the two markets is on the verge of changing.

In line with more tenants across both markets showing a greater inclination to relocate, there is an encouraging number of tenants in the market for Fringe space. These are dominated by IT users, however media and engineering tenants are also prominent. 

Aside from the 15,000sqm Technology One requirement, IT tenants active in the Fringe market include DXC Technology (3,500sqm), Melbourne IT (2,500sqm) and Genie Solutions (1,500sqm). Other larger tenants include WSP (5,500sqm). Goodstart Early Learning (4,500sqm), Downer (4,000sqm), AECOM (8,000sqm), Austereo (2,000sqm), WPP (1,500sqm) and APN (1,500sqm). 

While not all of these tenants will relocate, or may choose a location other than the Fringe, this represents an increase in the level of activity. The current market conditions are likely to encourage relocation.

Activity will be boosted by accommodative prime rents 

The Fringe market was slower to adopt elevated incentives than the CBD, however after being out-competed owners have since responded. Average prime incentives in the Fringe have now reached 38%, higher than the CBD, and expected to form the upper range for incentives this cycle. 

While incentives have increased from 37% to 38% over the past year, the impact on average effective rents has been mitigated by increases to face rents. Gross face rents averaged $558/m² as at April 2018, growth of 1.5% p.a. Effective prime rents are $346/m² gross, down by 0.2% over the past year, but effectively stagnant since early 2017. 

The increased tenant activity is anticipated to spur growth in prime rents from Q4 2018. Forecasts for prime effective Fringe gross rents are 3.3% and 3.4% over the next two years. 

Imminent commitments, and tenant interest in newly completed and larger contiguous vacant space are underwriting the expectation that the Fringe market will record sustained improvement from H2 2018.

For further information, including an analysis of the leasing market and rental forecasts see the full report.