Oversupply and vacancy rate creating a perfect storm for Brisbane office market

The Brisbane office market is facing a perfect storm.

A sobering report by forecaster BIS Shrapnel is predicting the sunshine state to be hit with an oversupply of stock for the next decade, along with a vacancy rate set to reach 18% plus in 2016.

The city's looming oversupply woes was just one of the topics examined in the Brisbane office market report. It looked at the strength of leasing and investor demand, all of which pointed to a challenging few years for the market.

Not mincing it's words, BIS Shrapnel said: "there’s a perception that further oversupply in the Brisbane CBD office market may be averted by withdrawing secondary buildings for conversion to residential or short term accommodation uses".

"While there are perhaps a handful of suitable candidates, it will be a case of too little too late."

The report warned that because of that oversupply pressure, rents and property values will take a hit. 

Author of the report, Christian Schilling, said there were three towers currently under way in the CBD that would add another 186,000 square metres of new space before the end of 2016, equal to 9% of current stock. 

In contrast, withdrawals for conversion or re- development expected over the same time horizon, he noted,  sum to just 72,000 square metres, or 120,000 square metres to the end of 2017.

"On balance, that is still one tower too many", he said. "And this is on top of weak demand and a vacancy rate of 14.2% at January this year".

Among some of the buildings slated as withdrawals in the report were 80 Albert Street,plus a number of buildings to be vacated by the state government over the next three and a half years, which include Health House, 80 George Street, the Executive Building, the Executive Annex, Neville Bonner Building and Forestry House. The Primary Industries Building was also flagged as a potential withdrawal for redevelopment, along with some odd small buildings for conversion to residential or short term accommodation. 

Against this backdrop, BIS Shrapnel is also forecasting demand to be weak in the near, with the CBD expected to suffer "a triple hit in the form of the Government’s release of surplus space, tenants leaving for the fringe, and falling mining investment".

The forecaster estimates that since 2012, cuts to the public service and it's accommodation have resulted in 120,000 square metres of surplus space in the CBD, plus a further 20 square metres in the fringe, all of which the government intends to release as lease expire.

It is forecasting another 70,000 square metres of space to be released in the CBD over the next 3 years.

Compounding the situation, it notes is the space vacated by BOQ, Ventyx, Flight Centre and Robert Bird Group, all of which are leaving the CBD for the fringe, resulting in more than 40,000 square metres of vacated space.

Also constraining demand, it added, was the downturn in mining investment.

“I don’t want to talk the market down, but it’s simple maths”, said Schilling. “Unless mining investment takes off again, which is highly unlikely to happen over the next three years, vacancy rates will blow out to over 18% in 2016.”

As such, he believes, the Brisbane office market would represent a very challenging environment for building owners, developers and investors.

"Anyone contemplating investing in Brisbane in the short term should think carefully about the potential consequences, as the market weakness is likely to persist for the rest of this decade”, Mr Schilling warned. 

Photo courtesy of Nam Nguyen/Flickr.