COVID-19 Brisbane CBD Office Market Outlook and Implications

May, 2020

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Outlook

The full impact of COVID-19 is unknown. To date there is limited sales evidence to assess the impact of COVID-19 on the Brisbane office market. The responses of Federal, State and Local governments and Corporate Australia are largely known but remain fluid at current times and the impacts of future events may significantly change our expectations for this market and sector. The measures announced under the Code of Conduct for commercial tenancies impacted by COVID-19 must be analysed, considered and financially adopted on
an asset-by-asset basis if required. Our update provides a snapshot of implications we expect to see and the outlook for the Brisbane CBD office market.

Authors

Michael Coverdale

Director

View Profile > QLD
Casey Robinson

Director

View Profile > QLD

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Supply

There are no buildings under construction that are scheduled to be completed this year. There is the possibility that supply chain issues relating to COVID-19 shutdowns could result in a delay of the projects that are scheduled for completion in 2021 and 2022. Furthermore, changing work arrangements may result in a structural change to the market, reducing net supply requirements over the longer-term.

Occupier Demand

Occupier demand will be reduced over the short-term. Leasing decisions for tenants are expected to be put on hold indefinitely, coupled with tenant’s experiencing significant financial hardship potentially leading to an overall reduction in the tenant pool. We expect there to be no net gain in occupier demand over the next 12 months. There are also medium- to long-term demand considerations relating to the likely acceleration of flexible working practices, which may reduce the need for more office space and the size of proposed tenancy sizes when business returns to post COVID-19 normality. We expect limited demand from co-working, education and tourism occupiers over the foreseeable period and the overall co-working footprint to come under pressure.

Vacancy

We expect the vacancy rate to increase by 100 to 200 basis points over the coming 18 months. Whilst the Commercial Code of Conduct is likely to protect businesses during the COVID-19 pandemic and period following, we are seeing businesses put expansionary and relocation plans on hold and it is likely that sub-lease vacancy will increase as businesses evaluate their tenancy size requirements.

Rents

We expect the vacancy rate to increase by 100 to 200 basis points over the coming 18 months. Whilst the Commercial Code of Conduct is likely to protect businesses during the COVID-19 pandemic and period following, we are seeing businesses put expansionary and relocation plans on hold and it is likely that sub-lease vacancy will increase as businesses evaluate their tenancy size requirements.

 

Incentive Levels

In addition to short-term increases in incentives to specific tenants that are highly impacted by the immediate economic climate, average incentives are also expected to increase. Prime incentives are expected to increase to average 37 – 40% whilst secondary incentives are expected to increase to average 40 – 45%. We then expect incentives will remain high for an extended period compared to our pre-COVID-19 expectations.

 

Sales Activity

The majority of office sale transactions have stopped or been put on hold due to the increased uncertainty (market and income risk), border restrictions and indecision in both vendors and potential purchasers. Institutions and private investors have been looking to stabilise their existing balance sheet before looking for new or future investment opportunities under a somewhat different economic landscape.

 

Yields

Yields will be property specific and dependent on occupancy profile and income security. Uncertainty and future economic conditions on industries will play a big part in assessing tenant covenant / income risk. Furthermore, the cost of capital and ability to source capital will impact yields over the short-term, with some asset types expected to receive a lower risk premium compared to others. Depending on the asset type and income profile, we expect that yields could soften (by up to 100 basis points) over the short term and that the divergence between average prime and secondary yields will expand.

We are of the view that the long-term fundamentals remain good and we expect the drivers of demand to rebound back to strong pre-COVID-19 conditions in the second half of 2021, however, we acknowledge the downside risk is uncertainty as to the longevity of the health crisis and its impact on the economy.