Brisbane's Month in Review - October 2020

Whilst the Brisbane office market is widely predicted to face challenging times ahead, money is cheap and interest rates are likely to remain at historic lows for the foreseeable future. This is one of the primary factors fuelling investor appetite at present.

The biggest challenge the office market faces is the uncertainty surrounding office leasing. The work from home necessity has significantly changed the landscape for centralised office accommodation needs, with an expectation of significant potential downsizing of space requirements for many businesses over the next five years. Whilst there are no established market metrics yet, this could be as much as a 20 per cent reduction in space requirements. If so, there is potential for a sustained period of high vacancies (including sub-lease accommodation) with flow on effects to demand for new buildings and values of existing sites.

Given the lack of leasing deals to date, it is still too early to say where face rents and incentive levels are sitting. Leasing agents are reporting that leasing enquiry has diminished significantly as businesses are stuck in limbo due to a lack of confidence in the local and wider economy and are unwilling to commit to long term leasing arrangements or exercise option periods until there is more certainty. There are also a number of zombie businesses that are only being held afloat by the government’s JobKeeper stimulus package. The prospect of a number of businesses closing their doors once JobKeeper ends in March 2021 will likely result in an increase in sub-lease space, higher vacancy rates and lower net absorption. A combination of these factors will inevitably see face rents decline and incentives increase.

Landlords have had to adapt to this revolving door and with significant uncertainty attached, short term leasing arrangements (12 months) are becoming the norm as businesses are reluctant to lock themselves into long term rental commitments in a potentially declining rental market.

Despite the prospects of turbulent leasing markets, commercial office assets are continuing to transact. Whilst sale volumes have diminished significantly, there has been no indication to suggest there is presently an oversupply. In fact, there is quite strong demand from private wealthy investors and small syndicates and property funds for suitable assets. Interest from these groups is largely for well-leased, modern offices underpinned by strong lease covenants. These assets are attracting strong bidding and are maintaining pre COVID-19 values, in some instances, achieving stronger prices and sharper yields as investors chase COVID-proof assets.

A notable recent sale is the multi-tenanted commercial asset, 232 Arthur Street, Teneriffe recently sold for $4.975 million reflecting an analysed yield of 6.36% and a WALE (by income) of approximately 4.14 years.

In contrast, secondary suburban investment office assets with historic vacancy and re-letting issues will be difficult to sell and yields are likely to soften. The spread between prime and secondary yields is therefore likely to widen.

Owner-occupiers remain active in the CBD and fringe CBD. Value levels appear to be holding in most instances, particularly for assets that have future redevelopment prospects. Suburban commercial precincts that are well supported by infrastructure (transportation, on-site parking and food amenities) are still transacting, but demand has declined.