Brisbane CBD Office m3property Insight
Vacancy in the Brisbane CBD Office market is expected to reduce over the next three years
Back to the fundamentals for the Brisbane commercial market
During recent years, the Inner Brisbane leasing market has been driven by some key trends, such as:
- The State Government’s expansion of its space requirements;
- Growth of co-working and other flexible office providers;
- The ‘flight to quality’ of tenants;
- Centralisation of tenants; and
- The consolidation of multiple offices into singular locations.
These factors, combined with the withdrawal of some secondary-grade buildings, resulted in the CBD vacancy rate declining from 16.2% as at January 2018 to be 13.0% as at January 2019.
With the exception of the still growing co-working sector, these drivers are now playing a smaller role in the Inner Brisbane leasing market. We expect that leasing demand in the Inner Brisbane market will be driven more from a macroeconomic level, with growth in public and private investment, employment and the overall economy being the key determinants of net absorption.
Yield compression driven by investment demand, not rental growth
Commercial property remains a sought-after asset class by both domestic and offshore buyers. Demand in Brisbane is emanating from higher yields on offer when compared to Sydney, Melbourne and offshore. During 2018 there was $2.75 billion of commercial property sold across the Inner Brisbane market, up marginally from 2017. CBD yields currently range between 5.00% and 6.25% for prime buildings and 5.75% to 7.00% for secondary buildings. Prime Fringe yields currently range between 5.75% and 7.00%.
Yields tightened considerably across the Inner Brisbane market over the past five years. In addition, the spread between yields for secondary assets and prime assets has narrowed. Buildings that have been sold multiple times during recent years demonstrate this trend of yield compression, as shown on the Inner Brisbane Yields Chart.
Evidence of yield compression
Rental growth will drive returns going forward
The Inner Brisbane commercial market is in a definite stage of recovery. Whilst during recent years there was a substantial disconnect between the leasing and investment markets, this disconnect is slowly starting to dissipate.
Rental growth will be the primary driver of total returns for Inner Brisbane commercial assets over the medium- to longer-term, with yield compression now thought to be slowing. Driving rental growth will be solid economic fundamentals and the declining vacancy.
Brisbane CBD Outlook