_Brisbane CBD office market poised for post-COVID expansion

The Brisbane CBD Office Market Report April 2021 found Investment market activity was rebuilding after a slow 2020, when turnover totalled $607.6 million; the lowest total transaction level since the post-GFC hangover of 2008 and 2009.

Knight Frank Head of Capital Markets Queensland Justin Bond said activity has returned to the market in 2021 with $210 million in deals settled so far and a further circa $530 million under contract, pointing to a strong year ahead.

Assets under contract include 10 Eagle Street, known as the Gold Tower, which is being sold by Dexus Property Group and CPPIB’s, Dexus Office Trust Australia (DOTA), to Marquette Properties, a local private syndicator, in a deal negotiated by Mr Bond, Paul Roberts and Neil Brookes of Knight Frank in conjunction with Savills.

“The dearth of major transactions during 2020 is lifting as economic conditions improve and non-gateway cities return to focus,” said Mr Bond.

“A demonstration of occupier resilience and economic upside has seen buyer activity increase since the fourth quarter of 2020.

“There remain relatively few CBD assets formally offered to the market, although that will change through the course of the second quarter this year.

“With recent campaigns resulting in successful sales, at firm yields, vendor confidence is improving.

“There is no doubt that purchaser appetite for Brisbane remains high, although non-core office is secondary to core office and industrial assets at this time on the buyer radar.”

Knight Frank Partner, Research & Consulting, Queensland and report author Jennelle Wilson said offshore activity in the investment market over 2020 was limited to the settlement of the one major sale of 66 Eagle Street, which accounted for 63% of the total transaction activity, with the remaining sales to domestic players.

“The current climate is providing local buyers with the opportunity to gain greater positions in the market prior to the expected uptick in global recognition for Brisbane as the Olympic Games grow closer, likely spurring a new tranche of global investment allocation.

“Brisbane is well placed long term as its profile grows on the world stage.

“Despite few transactions and limited offshore active buyers, yields have remained firm for core assets, with the yield band widening to reflect assets with short-term vacancy exposure.”

Leasing activity set to grow

The Knight Frank research found leasing activity since COVID-19 has been dominated by smaller tenants, with 85% of leasing activity (excluding renewals) during 2020 and into 2021 being for tenants with sub-1000 square metre requirements.

Knight Frank Head of Office Leasing Queensland Mark McCann said significant tenant activity was on the horizon as decisions that had previously been deferred by larger tenants would start to be cemented.

“There are a number of significant decisions with announcements imminent, and tenant engagement from larger users is expected to increase from the middle of this year,” he said.

“As these deals are formally announced to the market it will increase confidence on both the tenant and landlord markets.”

The Knight Frank research found tenants active in the CBD market and expected to make their next location decision announcements soon include CUA (6,000sq m), KPMG (8,000sq m), McCullough Robertson (4,000sq m), APA Group (4,000sq m) and the Federal Government (circa 38,000sq m).

Despite greater leasing activity forecast, Knight Frank research expects vacancy in the Brisbane CBD office market will increase again to peak at 15.7% in mid 2021 under the pressure of further negative net absorption and new supply.

“It is expected to remain elevated during 2022 before beginning to see material decreases during 2023,” said Ms Wilson.

“In the medium term, vacancy is expected to remain above 12 per cent through to 2024/25 which will continue to limit supply additions without substantial pre-commitment.”

Mr McCann said the wildcard in future vacancy remained the level of sublease space being marketed.

“The actions of tenants over the next 12 months on this space – to either reoccupy or relinquish – has the potential to move the needle for the total vacancy rate,” he said.

The PCA sublease vacancy remained relatively low at 1% (22,600sq m) in the January survey, however this only represents space physically vacated by the sublessor, said Ms Wilson.

“Across the CBD market Knight Frank is tracking around 50,000 square metres of sublease space available for lease; the difference being that more than half of this space has not yet been physically vacated, although it is likely significantly underutilised.

“Recently some full floors of sublease have been withdrawn from the market, however new sublease space continues to be put on the market and about 7,500 square metres of previously marketed occupied space has transitioned to physically vacant in the first quarter of 2021.”

The Knight Frank research found prime and secondary gross effective rents in the Brisbane CBD office market have fallen by 6.5% and 7.5% respectively since the onset of COVID-19, with the majority of this coming from increased incentives. Effective rents are expected to stabilise in late 2021.