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RESEARCH
2
Total vacancy has remained
elevated at 14.1%. The vacancy
rate is expected to rise again in
mid-2018 to 14.8%, before
beginning to ease.
Prime effective rents remain
stagnant. Increases to face rents
have been off-set by further
incentive growth. Improvement
in effective rents is expected from
late 2018.
Tenant requirements which are
considering the Fringe have lifted
with IT, media and engineering
tenants active.
Investor demand has remained
strong with prime median yields
firming 48bps over the past year.
A surge in offshore investor
activity took 2017 turnover to
record levels.
Senior Director — Research QLD
Withdrawals dominated the Brisbane Fringe during 2017
A total of 27,976sqm of secondary stock
was withdrawn from the Brisbane Fringe
market during 2017. Permanent
withdrawals for demolition or change of
use accounted for 16,212sqm of this,
dominated by 25 Donkin St, South
Brisbane (8,074sqm) and 312 Brunswick
St, Fortitude Valley (3,921sqm). The
remainder was temporary withdrawal for
refurbishment. The largest was 324
Wickham St, Fortitude Valley, where
LaSalle Investment Management will
commence the refurbishment of
Transport House in H2 2018 as part of
wider works on the retail and Fortitude
Valley train station interface.
There are two new buildings which will
provide new supply to the market during
2018. The first of these, recently
completed, is 900 Ann St, Fortitude
Valley. The 18,791sqm building was fully
pre-committed by Aurizon, however
Aurizon since offered c7,100m² of this for
long term sub-lease. Four of the five
floors of this space are now understood
to be under offer.
The Lend Lease development, K5 at
Showground Hill, Bowen Hills, is under
construction with completion anticipated
late 2018. The 14,429m² building is 43%
committed to Aurecon and features cross
laminated timber construction. Market
intel also suggests there is a further
significant commitment imminent in this
building.
Brisbane Fringe Office Market Indicators as at April 2018
Grade Total Stock
(m²)^
Vacancy
Rate (%)^
Annual Net
Absorption
(m²)^
Annual Net
Additions (m²)^
Average
Gross Face
Rent ($/m²)*
Average
Incentive
(%)
Average Core
Market Yield (%)#
Prime 659,723 13.4 -15,863 - 558 38.0 5.75—7.00~
Secondary 543,707 14.9 -22,037 -27,976 465 38.5 7.25—8.45
Total 1,203,430 14.1 -37,900 -27,976
Many projects are proposed, but only a few are expected to move to construction
Beyond the two buildings which will be
completed during 2018 there are no
further projects under construction.
However, as shown in Table 2, there are
a number of projects which have recently
sought or received development
approval. While initially responding to the
Suncorp brief (which did not shortlist any
Fringe options) subsequent briefs from
the ATO (up to 24,000sqm) and
Technology One (15,000sqm) further
brought development into the spotlight.
Subsequently it is understood that
neither ATO or Technology One have
shortlisted Fringe developments for their
potential relocation.
It is considered that none of the
development proposals would proceed
without significant pre-commitment.
Given the size of many projects, this
would require pre-commitment from
more than one tenant or downsizing of
the project. This will result in staggered
delivery of new product from 2020/21.
Supply in 2019 will be dominated by
refurbished accommodation with 151
Property understood to be finalising
plans to upgrade the 13,171sqm, 339
Coronation Dr, Milton, following Origin’s
relocation. Additionally the refurbishment
at 324 Wickham St, Fortitude Valley will
complete Q1 2019.
3
RESEARCH BRISBANE FRINGE OFFICE MAY 2018
Major Additions and Withdrawals— Brisbane Fringe
Additions
Address Precinct NLA (m²) %
Leased Major Tenant/s Developer Status Date
315 Brunswick St, Fortitude Valley
Urban Renewal 10,908 60% State
Government Ashe Morgan Investments
Refurbishment Complete
Oct 16
900 Ann St, Fortitude Valley
Urban Renewal 18,791 100% Aurizon (sublease
c7,100m²) Consolidated Properties onsold to Charter Hall
Construction Apr 18
K5, Showground Hill, 25 King St, Bowen Hills
Urban Renewal 14,429 43% Aurecon Lend Lease Construction Late 18
234 Wickham St, Fortitude Valley
Urban Renewal 8,924 - - LaSalle Asia Opportunity
Fund IV Refurbishment Mar 19
339 Coronation Dr, Milton
Milton 13,171 - - Valad/Blackstone Refurbishment Oct 19
11 Breakfast Creek Rd, Newstead
Urban Renewal 29,725 GFA^
12% John Holland Charter Hall Office Trust/
John Holland# Approved STP
36-52 Alfred St, Fortitude Valley
Urban Renewal 32,693 - - LaSalle Asia Opportunity
Fund IV Approved STP
301 Wickham St, Fortitude Valley
Urban Renewal 35,000^ - - Cornerstone Properties Approved STP
Jubilee Hotel, 470 St Paul’s Tce, Fortitude Valley
Urban Renewal 18,800 GFA
- - JGL Properties Approved STP
152 Wharf St, Spring Hill
Spring Hill 30,500 - - Wharf Investment
Corporation Approved STP
801 Ann St, Fortitude Valley
Urban Renewal 44,300 - - Walker Corporation Approved STP
358 Wickham St, Fortitude Valley
Urban Renewal 22,114 - - Prime Space/Grocon Approved STP
CDOP 7, Milton Milton 19,600 - - AMP/Sunsuper Mooted STP
K3, Showground Hill Bowen Hills
Urban Renewal c25,000 - - Lend Lease Mooted STP
895 Ann St, Fortitude Valley
Urban Renewal c25,000 - - Consolidated Properties Mooted STP
Major Withdrawals (1,500m²+)
Address Precinct NLA (m²) Owner Reason for Withdrawal Date
611 Coronation Drive, Milton
Milton 1,756 Private Investors Withdrawal for redevelopment
(student accommodation) Dec 17
25 Donkin St, West End
Inner South 8,074 R&F Properties Withdrawal for redevelopment
(residential) Dec 17
312 Brunswick St, Fortitude Valley
Urban Renewal 3,921 Private Investors
(assoc Hutchinson Builders) Withdrawal for change of use
(retail/entertainment) Dec 17
Landcentre Building Woolloongabba
Inner South 16,000 State Government Withdrawal for demolition
(Cross River Rail Station/construction) Jun 18
301 Wickham St, Fortitude Valley
Urban Renewal 2,512 Cornerstone Properties Potential withdrawal for redevelopment
(office) tba
895 Ann St, Fortitude Valley
Urban Renewal 2,824 Private Investor Potential withdrawal for redevelopment
(office) tba
207 Wharf St, Spring Hill
Spring Hill 4,695 Land & Homes Group Potential withdrawal for redevelopment
(residential or hotel) Mooted
4
Vacancy peak will be mid-2018
The impact of the large tenant relocations
outlined above, along with 7,000sqm of
new supply which may be physically
vacant on completion, will see the total
Fringe vacancy rate increase to mid-
2018. The majority of this will be felt in
the Milton and Urban Renewal markets
with the remaining precincts relatively
less affected.
With the assumed temporary withdrawal
of 339 Coronation Dr, Milton for
refurbishment, the impact of Origin’s
departure from Milton will be lessened,
with the total vacancy lift only into the
low 20%s.
Total vacancy in the Fringe is expected
to show sustained recovery from late
2018. Improved tenant activity will return
to the market in an environment of no
additional short term supply.
While there are a number of contiguous
spaces, or whole buildings, currently
vacant many of these are not prime
space. With demand expected to pick up
more strongly for prime space the prime
vacancy is expected to show greater
short term improvement than secondary.
With only a handful of top-tier prime
buildings, the level of competition can
quickly build for these assets.
Net Absorption will remain negative in the short term
Net absorption was negative for the
whole of 2017 and this is expected to
remain the case in the first half of 2018.
Despite significant tenant moves into the
Fringe market—ie Aurizon (11,691sqm),
the overall tenant movement will be out of
the Fringe market in H1 2018.
Departures from the Fringe in the first half
of 2018 will be dominated by Origin
Energy’s relocation in to the CBD, leaving
at least 25,000sqm of backfill space in
Milton. Additionally the proposed July
2018 demolition of the Landcentre at
Woolloongabba will see c16,000sqm of
State Government tenancies relocate into
the CBD.
From H2 2018 onward the net absorption
is expected to return to positive as the
Fringe regains some of its competitive
rental advantage against the CBD.
Additionally, the Fringe will gain traction
in drawing tenants from suburban
markets, given the space available and
rental levels. Confidence is being
enhanced by the recent strong population
growth in Greater Brisbane (2.0%), a
significant pipeline of major construction
and infrastructure, indications that QLD
economic growth is heading back
towards trend levels and green shoots in
the resources and energy sectors.
Vacancy remains elevated due to negative net absorption
The total vacancy rate for the Brisbane
Fringe market decreased over the six
months to January 2018, reducing from
14.6% to 14.1%, but remaining above
the levels of a year earlier.
In the absence of significant new supply
this elevated vacancy was a result of
negative net absorption across the
market, with total occupied space
-37,900sqm lower over the course of
2017.
Unlike the CBD, where there is a marked
diversion between the vacancy rate for
prime and secondary, the Fringe prime
and secondary vacancy rate is relatively
close. Recent deterioration in the prime
market has taken the vacancy to 13.4%.
In part this was due to two Fringe
buildings, previously with significant sub-
lease space and partially occupied,
transferring to direct vacancy at lease
end, with a resultant gap in occupation.
The secondary market vacancy has been
assisted by the withdrawal of obsolete
stock. However market traction is limited,
particularly in the C and D grade
properties (although D grade market only
represents 11,018sqm of space).
Brisbane Fringe Vacancy % total vacancy
Brisbane Fringe Net Absorption (‘000m²) per 6 month period
Brisbane Fringe—Vacancy Rates
Precinct Jan 17 (%) Jan 18 (%)
A Grade 11.0 13.4
Prime 11.0 13.4
B Grade 14.5 13.5
C Grade 15.6 15.6
D Grade 25.5 50.9
Secondary 15.2 14.9
Milton 18.2 17.1
Urban Renewal 11.3 14.1
Spring Hill 15.0 17.6
Toowong 10.1 11.9
Inner South 11.4 10.3
Total 13.0 14.1
0%
2%
4%
6%
8%
10%
12%
14%
16%
Jan-1
2
Jul-
12
Jan-1
3
Jul-
13
Jan-1
4
Jul-
14
Jan-1
5
Jul-
15
Jan-1
6
Jul-
16
Jan-1
7
Jul-
17
Jan-1
8
Jul-
18
Jan-1
9
Jul-
19
Jan-2
0
forecast
-40
-30
-20
-10
0
10
20
30
Jul-
14
Jan-1
5
Jul-
15
Jan-1
6
Jul-
16
Jan-1
7
Jul-
17
Jan-1
8
Jul-
18
Jan-1
9
Jul-
19
Jan-2
0
six months to
forecast
5
RESEARCH BRISBANE FRINGE OFFICE MAY 2018
A number of IT, media and engineering companies are actively seeking space
Over the past 18 months the Fringe was
struggling to attract and retain both
smaller and large tenants, with many
opting for the CBD due to the relatively
attractive rental terms that were on offer.
The only notable exception has been for
newly developed space, where these
Fringe buildings have drawn tenants
(Aurizon, Aurecon, plus a rumoured
further two imminent commitments).
Demand is showing sustained
improvement in the CBD, and Fringe
effective rents remain plateaued as
incentives reach new heights. Therefore,
the competitive tension between the two
markets is on the verge of changing.
In line with more tenants across both
markets showing a greater inclination to
relocate, there is an encouraging number
of tenants currently in the market for
Fringe space. These are dominated by IT
users, however media and engineering
tenants are also prominent. Aside from
the 15,000sqm Technology One
requirement, IT tenants understood to be
active in the Fringe market include DXC
Technology (3,500sqm), Melbourne IT
(2,500sqm), Honeywell (3,000sqm) and
Genie Solutions (1,500sqm). Other larger
tenants include WSP (5,500sqm).
Goodstart Early Learning (4,500sqm),
Downer (4,000sqm), AECOM (8,000sqm),
Austereo (2,000sqm), WPP (1,500sqm)
and APN (1,500sqm). While not all of
these tenants will relocate, or may
choose a location other than the Fringe,
this represents an increase in the level of
activity. The current market conditions
are likely to encourage relocation.
Prime rents will remain accommodative during 2018
The Fringe market was slower to adopt
elevated incentives than the CBD,
however after being out-competed
owners have since responded. Average
prime incentives in the Fringe have now
reached 38%, higher than the CBD, and
expected to form the upper range for
incentives this cycle. While incentives
have increased from 37% to 38% over
the past year, the impact on average
effective rents has been mitigated by
increases to face rents. Gross face rents
average $558/m² as at April 2018, growth
of 1.5% p.a. Effective prime rents are
presently $346/m² gross, down by 0.2%
over the past year, but effectively
stagnant since early 2017.
This is expected to remain the case
through the majority of 2018 with
increased tenant activity anticipated to
spur some growth in prime rents from Q4
2018. Forecasts for prime effective gross
rents are 3.3% and 3.4% over the next
two years. This is indicative of a
sustained, but relatively modest,
improvement to market conditions.
Despite improving demand there is likely
to continue to be relatively large tranches
of available space to limit overall market
improvement in the short term.
The removal of obsolete stock and
capital investment from owners has seen
secondary face rents increase, from
$448/m² in April 2017 to $465/m² as at
April 2018. However incentives increased
over the same period, reaching 38.5% on
average, equating to secondary rental
effective growth of 2.1%. This has
returned the market to 2014 levels, as the
dip of 2015 & 2016 unwinds. Forecasts
are for secondary effective rental growth
of 2.0% - 3.0% p.a in the next two years.
Brisbane Fringe Rents $/m² p.a average gross effective rent
Recent Leasing Activity Brisbane Fringe
Address NLA m² Face
Rent
Term
yrs
Incentive
(%)` Tenant
Start
Date
147 Coronation Dr,
Milton 1,344 535 g 6 35-40 QTAC Sep 18
99 Melbourne St, South Brisbane
1,667 565 g 7 35-40 Publicis Mojo Sep 18
520 Wickham St, Fortitude Valley
2,254 600 g 5 40+ RPS Group Jul 18
5 King St, Bowen Hills
6,489 c590 n 10 undis Aurecon^ Jul 18
100 Brookes St,
Fortitude Valley 3,491 600 g 5 35-40 Aurizon Jun 18
900 Ann St, Fortitude Valley
18,791# 545 n 12 undis Aurizon^ Apr 18
154 Melbourne St, South Brisbane
1,092 585 g 5 35-40 Klohn Crippen
Berger Mar 18
10 Browning St, South Brisbane
1,274 535 g 7 30-35 Shortcut Software Sep 17
100
150
200
250
300
350
400
450
500
Ap
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Oct-
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Oct-
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Oct-
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PRIME SECONDARY
forecast
6
Offshore investors accounted for 51% of
transactions by value during 2017. This
was dominated by M&G (520 Wickham
St, Fortitude Valley—$119.15 million),
Ascendas Business Park Trust (100 &
108 Wickham Sts—$190.06 million) and
Korean Teachers Fund/AXA (505 St Pauls
Tce—$205.5 million). This indicates
offshore investors are comfortable to
take on significant assets in the Fringe.
Particularly in the second half of 2017
and into 2018, there was greater
investment from domestic buyers into the
Fringe market. The unlisted AMP Capital
Wholesale Australia Fund purchased two
assets—76 Skyring Tce, Newstead and
199 Grey St, South Brisbane. Additionally
Charter Hall Long WALE REIT purchased
the Virgin Headquarters at Bowen Hills
and the Cromwell Direct Property Fund
purchased a fully leased building at 433
Boundary St in Spring Hill.
Despite increased activity from domestic
institutions AREITs were the only
domestic net buyers in the past year,
with the Unlisted Funds/Syndicates
remaining net sellers. Offshore buyers
remained the strongest net buyers, given
their increasing presence in the market.
Record transaction levels
The increased investor interest in the
Brisbane Fringe market translated to a
record high level of transactions during
2017. In 2017 $1.098 billion in
transactions (above $10 million) were
recorded, well ahead of $597.9 million in
2017 and exceeding the previous record
of $799.6 million during 2014.
Recent Sales Activity Brisbane Fringe
Address Grade Price $
mil
Core
Market
Yield % NLA m²
$/m²
NLA
WALE
yrs Vendor Purchaser
Sale
Date
76 Skyring Tce,
Newstead ^ A 72.50 6.00 8,994 8,061 4.1 Aveo Properties
AMP Capital Wholesale
Australia Property Fund Jan 18
433 Boundary St,
Spring Hill B 42.00 6.70* 5.997 7,004 9.2 Alceon Properties
Cromwell Direct Property
Fund Dec 17
108 Wickham St,
Fortitude Valley~ A 106.23 6.24 11,913 8,917 6.5
Centennial Property
Group
Ascendas Business Park
Trust Dec 17
56 Edmonstone St,
Bowen Hills A 90.80 6.66 12,427 7,307 8.4
Charter Hall VA Trust
(single asset fund)
Charter Hall Long WALE
REIT Dec 17
199 Grey St,
South Brisbane A 92.60 6.85 11,845 7,818 4.5 Tribune Properties
AMP Capital Wholesale
Australia Property Fund Oct 17
100 Wickham St,
Fortitude Valley~ B 83.83 6.69 13,131 6,384 4.7 Keystone Private
Ascendas Business Park
Trust Sep 17
12 Commercial Rd,
Newstead# A 47.00 6.06 6,558 7,167 5.6 Cambooya Pty Ltd Cape Bouvard Properties Sep 17
520 Wickham St,
Fortitude Valley A 119.15 6.01 14,672 8,121 5.6 AFIAA M&G Real Estate Aug 17
^purchased in tandem with major retail centre, allocated price for office component *passing yield ~together these two properties cover an island site # includes the retail, pub and Liqourland component
Brisbane Fringe Transactions $ million transactions $10m+
After a strong end to 2017, there have
been only two confirmed Fringe sales to
date in 2018. These are 76 Skyring Tce
($72.50 million), and 130 Commercial Rd
($20.35 million), both in Newstead. While
not an office asset, Dexus has recently
purchased 586 Wickham St, Fortitude
Valley for $91.20 million on a yield of
5.75%. The property has a new eight year
lease to Autosports Group.
Brisbane Fringe Purchaser/Vendor $ million sales ($10m+) 12 mths to May 2018
0
100
200
300
400
500
600
700
800
900
1,000
1,100
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
-500
-400
-300
-200
-100
0
100
200
300
400
AR
EIT
Private
Investo
r
Ow
ner
Occup
ier
Off
sho
re
Unlis
ted
/
Synd
icate
Sup
er
Fund
Develo
per
PURCHASER VENDOR NET PURCHASE/SELL
7
RESEARCH BRISBANE FRINGE OFFICE MAY 2018
Yield compression has remained in force
The sustained investor interest and
activity in the Fringe market has
supported further yield compression over
the past year. As at April 2018 the prime
core market yield ranges between 5.75%
and 7.00% with a median of 6.38%. This
represents a tightening of 48 basis points
over the prior 12 months and 225 basis
points over this market cycle.
After falling to a low of 38 basis points in
mid-late 2017, the spread to Brisbane
CBD prime yields has increased slightly
to 43 basis points, but still remains
closely aligned with the CBD. With a core
of assets constructed within the past 10
years, generally having good tenant
covenants, the Fringe prime market has
been well accepted by investors with only
a limited risk premium applied compared
to CBD investments.
It is noticeable that South Brisbane and
the Urban Renewal precinct remain
favoured, both due to stock available and
current leasing market sentiment. In
contrast Milton, Toowong and Spring Hill
are not currently receiving the same level
of core investment market demand.
In line with the wider investment market,
secondary yields have also recorded
further compression. The current yield
range of 7.25% - 8.45% represents
tightening of 35 basis points over the
year to April 2018.
There is steady demand for stabilised
secondary assets, or those which are of a
scale and built form which make them
attractive for a major refurbishment and
re-leasing programme.
While the Fringe was the subject of
record levels of investment during 2017,
as investors seeking to place capital in
Australia looked beyond Sydney and
Melbourne, the leasing market is still
lagging the CBD. As this improvement in
sentiment and activity extends from the
CBD market and into the Fringe, the level
of investment demand is also expected
to grow further, attracting new investors
and placing further downward pressure
on yields.
Brisbane Fringe Core Market Yields % Yield (LHS )Prime v Secondary & BPS (RHS)
There will be 33,220sqm of new
supply completed in the Fringe
during 2018, the first new supply
since the completion of the Flight
Centre Building in 2016. With
direct and sub-lease space
available in these projects, this is
attracting strong interest from
tenants With no additional
projects under construction,
supply in 2019 will arise from
refurbishments.
While there are a number of
potential future office
developments across the Fringe,
none are expected to commence
without significant pre-
commitment. Given the size of
many projects this will require
more than one tenant to pre-
commit and this is expected to
see new supply delivery remain
sporadic from 2020/21+.
Fringe tenants moving into the
CBD (Origin, State Govt, Allianz)
will outweigh moves in the
opposite direction (Aurizon,
Aurecon) taking the vacancy rate
to its peak in mid-2018. From
late 2018 the lack of new supply
will support steady erosion of the
vacancy rate in 2019 & 2020.
Tenant briefs which are
considering Fringe space have
appeared to increase recently
with IT, media and engineering
tenants prominent. While
competition from the CBD will
remain high, the sustained
plateau in Fringe prime effective
rents and incentives at peak
levels of 38% may be beginning
to change the competition
dynamics between the two
markets.
The majority of 2018 will see no
material improvement in effective
prime rents, however growth will
emerge late 2018 and into 2019,
driven by increased tenant
activity and limited supply.
Average effective prime rental
growth is to average 3.5% over
the next three years.
Yields remain on a firming trend,
and this will continue, particularly
in the prime market. With the
Fringe, in tandem with the CBD,
being well regarded by investors
seeking exposure to the upside
present in Brisbane, the market
will continue to see high
investment inflows, particularly
from offshore.
Outlook
-
20
40
60
80
100
120
140
160
180
200
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
Ap
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SPREAD PRIME V SECONDARY (RHS)
PRIME YIELDS (LHS)
SECONDARY YIELD (LHS)
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Gold Coast Office
Market Overview
March 2018
Brisbane Investment
Environment
March 2018
The Wealth Report
2018
Knight Frank Research Reports are available at KnightFrank.com.au/Research
Brisbane CBD Office
Market Overview
April 2018
Important Notice
© Knight Frank Australia Pty Ltd 2018 – This report is published for general information only and not
to be relied upon in any way. Although high standards have been used in the preparation of the
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RESEARCH
Jennelle Wilson
Senior Director
+61 7 3246 8830
[email protected] Ben Burston
Group Director
+61 2 9036 6756
CAPITAL MARKETS
Ben McGrath
Managing Director—QLD
+61 7 3246 8814
[email protected] Justin Bond
Senior Director—Institutional Sales
+61 7 3246 8872
[email protected] Christian Sandstrom
Senior Director, Head of Commercial
Sales
+61 7 3246 8833 [email protected] Matthew Barker
Senior Executive —Commercial Sales
+61 7 3246 8810
OFFICE LEASING
Andrew Carlton
Senior Director—Office Leasing
+61 7 3246 8860
Shane Van Beest
Director—Office Leasing
+61 7 3246 8803
OCCUPIER SOLUTIONS
Matt Martin
Senior Director, Head of Occupier
Solutions QLD
+61 7 3246 8822 [email protected]
VALUATIONS
Peter Zischke
Director
+61 7 3193 6811 [email protected]
Definitions:
Core Market Yield: The percentage return/yield analysed when the assessed fully leased net market
income is divided by the adopted value/price which has been adjusted to account for property
specific issues (i.e. rental reversions, rental downtime for imminent expiries, capital expenditure,
current vacancies, incentives, etc).
WALE: Weighted Average Lease Expiry
Precincts:
Milton—Includes the suburbs of Milton and Petrie Terrace
Urban Renewal—Includes the suburbs of Fortitude Valley, Newstead and Bowen Hills
Spring Hill—Spring Hill
Toowong—Toowong
Inner South—Includes the suburbs of South Brisbane, West End, Kangaroo Point, East Brisbane and
Woolloongabba
