Brisbane's Month in Review

The Brisbane office market presently has a high level of uncertainty with more questions than answers about its future direction and the ongoing impacts of COVID 19. Almost a year on from the start of the COVID 19 crisis, it is clear that office markets remain the sector about which there is most conjecture and the greatest level of market uncertainty. Adding to this uncertainty is the volatile trajectory of the disease in Australia and the response that has seen offices quickly emptied as workers were sent home for lengthy lockdowns.

Whilst the lockdown in Queensland was ostensibly the shortest of the three eastern states, there has been an extended period of work from home for many CBD offices which was only relaxed in the latter months of 2020. Even then, it is now clear that many workplaces are instituting far more liberal work from home arrangements with a consensus seeming to form around a two- or three-day office presence (with Mondays and Fridays the preferred work from home days). The impact of these arrangements on the ongoing need for office accommodation will be profound and have follow through impacts on office markets for years to come.

At a basic level, it would appear that there is a significant under-utilisation of office space at the present time. Whilst the extent of this will oscillate through the working week and doesn’t therefore directly correlate to an ability to reduce office space by a commensurate amount, it is now putting a huge question mark on the future office needs of every organisation, with the prospect of widespread downsizing as leases expire.

The immediate impact of this on office markets is: a heightened level of uncertainty; shorter lease terms; more flexible lease options; and significant increases in the availability of sublease space. This is likely to ultimately translate into reduced effective rent levels (initially via increased incentives) and will have longer term impacts on the viability of future development.

To date we have observed substantially reduced levels of leasing activity for larger requirements, shorter lease terms and a dramatic slowing in the volume and size of office market transactions. There is not yet broad-based evidence of face rental reductions, however this is a high probability as overall vacancy increases.

The principal impact has been felt in the CBD and fringe markets to date. Suburban locations appear to be holding up so far. It is however shining a stronger spotlight on the need for good quality buildings, strong locations, good parking ratios and accessibility as keys to securing tenants.

In terms of investment activity, there are few transactions however those that have occurred have been for properties with strong lease covenants and a healthy WALE or term certain. In particular we note that properties with government backed leases are keenly sought and have formed the predominance of the post-COVID sales activity.

A recent sale in this regard was 36 Brandl Street, Eight Mile Plains at an analysed yield of approximately 6.64% having a WALE of 4.85 years with a state government lease profile (74 per cent of the achievable gross income).

The future of the Brisbane market is dependent upon how the COVID crisis continues to unfold. There is a large weight of money seeking good quality investment property, however confidence levels are very fragile and the markets could easily be spooked if there were further significant outbreaks.