With Sydney and Melbourne commercial office property very much in demand, investors have been looking at Brisbane as a viable alternative investment option. In this article, we consider the opportunities and challenges of investing in commercial property in Brisbane.

Prices are at historic highs in Sydney and Melbourne, in part due to a strong influx of overseas capital. Yields on recent landmark CBD prime office transactions have been as low as 4.5%. As a result, some investors are looking at Brisbane due to it having a higher comparative yield. As ever, there are wider issues to consider rather than just a simple price based comparison.

Brisbane’s current position

While Brisbane is less than half (45%) of the size of the Sydney office market, it currently has much higher vacancy rates of 15.7% and incentives up to 40%. Sydney and Melbourne are hovering around 6.0% and 6.5% vacancy with incentives of 22% and 30% respectively.

Brisbane’s high vacancy rate can be primarily attributed to the end of the mining boom, and reduction in demand from mining and related services industries. This has resulted in weak tenant demand and an excess of office space.

Additionally, construction of new office space in the Brisbane CBD, particularly the completion of 1 William Street in October 2016, and the accompanying move by government employees into their dedicated 74,800 square metre (sqm) building, has created additional vacancy.

This has led to what can be described as a tenant’s market, with landlords having to compete heavily. Refurbished floor space, upgraded building services, and offering speculative fitouts are all options they have come to rely on. The latter has become increasingly popular amongst sub-1000 sqm tenants – who made up a majority of demand in 2017.

Vacancy

Brisbane of the future

Ambitious tourism projects and upgrades due for completion in the next few years will all contribute to Brisbane’s future.

This will include the proposed Port of Brisbane cruise terminal which is due to open in 2020. The terminal will deliver a permanent docking space for the world’s largest cruise ships, which are currently unable to pass under the Gateway Bridge, and transform the city into a major cruise destination.

A widespread focus on upgrading Brisbane’s masterplanned trade and industry site, TradeCoast, will also boost business prospects. The parallel runway project at Brisbane Airport, the biggest aviation project in Australia, will see a 60% increase in annual flights upon completion in 2020. This is expected to deliver economic benefits of $5 billion per year by 2035.

Initiatives such as these are significantly increasing the region’s trade prospects by transforming Brisbane into a better connected global hub.

There are also a number of Brisbane city based infrastructure projects underway including Howard Smith Wharves and the $3 billion Queens Wharf project. Additional projects currently undergoing the approval process include the $2 billion Brisbane Live project and the $944 million Brisbane Metro transport system. These will all deliver thousands of jobs during construction and further opportunities for businesses once complete.

The office outlook

The Brisbane office market is currently near the bottom of the cycle (see Insight, Spring 2017). Despite the tourism and trade projects that are currently underway or in the wings, conditions are expected to remain tough over the coming two to three years.

The continued lacklustre demand from mining and other services industries has kept employment growth relatively weak. This means there is little prospect of a substantial improvement in demand to absorb the existing overhang of office space.

The saying goes, ‘build it and they will come’, but it takes time for substantial infrastructure, trade and tourism improvements to come to fruition.

Slow economic growth may mean only minor improvements in the commercial office market in the short term. Stronger growth over the longer term, alongside extensive infrastructure projects, should begin to push the vacancy rate trend downwards, with momentum gaining as time progresses. While Brisbane may not be ‘back’ just yet, all signs point to a promising future.