Tighter supply to cushion Brisbane office market from long-term pain of coronavirus

Demand declined significantly during the crisis, with most businesses opting to renew or extend leases on a short-term basis, according to Caden Office Leasing senior leasing executive Lewis Harper.

However, he said, staying put had the potential to create demand next year.

“Businesses that may previously have been investigating the office market to account for growing teams almost exclusively put any requirements on hold,” Mr Harper said.

“The effect of having businesses extending their leases for a short term will be the creation of a level of pent-up demand that will leak into the market over the next 12 to 18 months.”

Mr Harper said businesses looking for office space over the months ahead would likely prioritise flexibility of lease terms, preferably shorter than three years, as well as reduced costs.

CBRE Brisbane office leasing director Chris Butters said while the outlook remained uncertain, there was little new office supply on the horizon.

“Whilst the near term for Brisbane appears weak, we are fortunate that supply remains constrained, particularly post-2021,” Mr Butters said.

“This, in conjunction with the fact our prime market has contracted to below 10 per cent vacancy for the first time in five years, will assist in easing long-term pain.”

Mr Butters said the impact on rents, incentives and net absorption remained somewhat of an unknown due to the speed and severity of the crisis.

However, effective rental reversion and weakening demand was forecast for the next 12 to 18 months, he said.

“Another factor that may soften the blow to the Brisbane office market is the high exposure to government tenants that are less likely to contract,” Mr Butters said.

“In addition, the mining sector is expected to be relatively resilient through this period as a result of the weaker Australian dollar helping to buffer the decline in commodity prices.”

JLL’s head of office leasing for Queensland Adam Barrett said it was too early to provide a thorough assessment on the office market, however the downward vacancy momentum over recent years was likely over.

Likewise the demand from smaller tenants, sub-1000 square metres, which had been prevalent since 2014, he said.

“Although the federal government’s JobKeeper program will assist in sustaining businesses through this difficult time, it is likely that demand for office space will be affected, in particular for smaller tenants,” Mr Barrett said.

“We also anticipate that there will be an increase in sub-leasing among larger tenants as the expectation of economic recovery shifts from short and sharp to longer and moderate.”

Colliers office leasing national director Matt Kearney said the fundamentals of the Brisbane office market remained solid, partly due to significant infrastructure investment over recent years.

He said while many businesses had delayed office decision-making at present, demand was expected to recover from next year.

“Unfortunately, some businesses will not survive the financial shocks to their businesses and many tenants will extend their leases to capitalise on immediate rent relief opportunities,” Mr Kearney said.

“We still believe, though, that the majority of office occupiers will come to the market to explore suitable opportunities, where we will experience the new trend of a flight to a workplace that addresses its employees’ health and wellbeing requirements.”

He said future office developments may even start to emphasise health and wellbeing aspects for employees to better attract tenants.

Vacancy was expected to remain at the long-term average of 12.5 per cent over the medium-term with landlords continuing to compete fiercely for tenants, Mr Kearney said.

A major repositioning of rents was unlikely in the short term, but vacancy was forecast to increase, said Mr Harper.

While most businesses were in a strong position to ride out the coming months, he said it was once the tap of government financial help had been turned off that business reality was likely to set in.

“Most building owners are well-capitalised and this will provide a buffer to resist any downward pressure on rents,” Mr Harper said.

“Government intervention has cast a safety net under a lot of businesses and the most trying time will be when these measures are terminated – meaning when many businesses are standing on their own two feet again.”

Mr Harper said some likely changes to future office leasing deals included delayed commencement dates and extended rent-free periods.

But frontline incentives, such as rental abatement and fit-out contributions, were not expected to increase significantly.