Shortage of new office supply drives competition amongst local and foreign investors.
Competition in the Brisbane metro office market is heating up with a record of $533 million transacted in the first half of 2014 as the city’s office vacancy and increased residential development impact upon new office supply.
According to a new Colliers International report, Competitive Rivalry: Office Versus Residential in Metro Markets, foreign investors re-emerged in the metro market during the first half of 2014 acquiring over $254 million in assets: Union Investment Real Estate purchased Southpoint for $200.6 million in Southbank and Blackstone snapped up 339 Coronation Drive in Milton for $53.7 million.
Jason Lynch, Director of Capital Markets at Colliers International said there were a total of 11 sales during this period with the two foreign companies acquiring the biggest assets. “Domestic buyer groups comprised REITS and unlisted institutions which bought up $205 million worth of metro office assets, with the remainder being private investors and property groups.
“In the last three months there has been an increased amount of Asian investor interest looking to reweight their capital into our CBD and metro markets. A Grade assets, particularly those with long lease terms and good quality tenants are highly sought after,” said Mr Lynch.
“The issue investors face is the lack of new supply which has mostly been influenced by the reasonably high 12.2 per cent vacancy rate and the residential development trend transpiring in the Brisbane metro market.
“The feasibility of developing new large office developments is diminishing due to increasing land values driven primarily by the improved residential apartment market and the CBD’s competitive position with respect to rents and incentives.”
Mr Lynch said the residential development trend is particularly apparent in Spring Hill where secondary office asset conversions are taking place for residential and hotel uses leading to a decline of circa 20,000sq m of office stock over the past year.
“More recently private investors have acquired two Spring Hill offices with vacant possession in the first half of this year which have potential for residential redevelopment. These included 152 Wharf Street and 183-185 Wharf Street which were sold for $13.5 million and $6.1 million respectively,” said Mr Lynch.
Vivienne Bolla, Senior Research Analyst at Colliers International said Urban Renewal precinct was the only Brisbane metro precinct to have supply additions in the first half of 2014, with the completion of 41 O’Connell Terrace (7,634sq m) and a refurbished office building also returned to the market.
“This precinct is likely to continue to have a high level of vacant space due to new supply being introduced into the market with 757 Ann Street (8,582sq m) and Gasometer 2 (23,420sq m) being recently completed. Majority of the tenants that are enquiring are relocating and consolidating rather than expanding with the vacancy in this region likely to remain stable over the next couple of years.
“The Inner South continues to remain the most tightly held precinct in the metro market with the vacancy rate falling to 3.4 per cent from the previous level of 4.3 per cent, translating into 8,855sq m of vacant space. The vacancy is forecast to further drop to 2 per cent over the next year.
Ms Bolla said that Brisbane metro office markets experienced a decline in vacancy during the first half of 2014 with the total vacant space reducing to 145,317sq m due to positive net absorption across the Inner South, Urban Renewal and Spring Hill markets.
“Looking ahead, the overall vacancy rate for the Brisbane metro markets is forecast to decrease from 12.2 percent down to a minimum of 11 per cent in 2016.
“The key driver to tenant demand is business confidence and this should transcend into uplift in leasing transaction activity over the next six months.
“While there has been an upward revision to incentives over the last twelve months this is expected to stabilise and the subsequent decline in rents will begin to moderate,” said Ms Bolla.