m3commentary INNER BRISBANE OFFICE CBD and Fringe

Transcription

1 m3commentary INNER BRISBANE OFFICE CBD and Fringe Spring 2017 Key Research Contacts: Casey Robinson Research Manager QLD (07) Jennifer Williams National Director NSW (02) Amita Mehrotra Research Director VIC (03) Zoe Haskett Research Manager SA (08) m3property.com.au P1

2 CONTENTS Market Overview 3 Key Influences 4 Leasing Market Trends 5 Key Indicators 6 Significant Sales 9 Outlook 10 Conditions in the Inner Brisbane office market are not as bad as suggested by the vacancy rate DEFINITIONS Compound Annual Growth Rate (CAGR): The annual growth rate over a period of year, calculated on the basis that each year s growth is compounded. Equated Market Yield (EMY): An annualised yield that is derived from the current net income and future changes to the net income over time with specific consideration of future rental growth. It is the rate of return over a specific time period that has been adjusted for rental growth. Grade: is determined using the PCA report A Guide to Office Building Quality. Inner Brisbane Office Market: Includes the CBD and Fringe. Internal Rate of Return (IRR): The discount rate that equates the present value of the net cash flows of a project with the present value of the capital investment. It is the rate at which the Net Present Value equals zero. The Internal Rate of Return reflects both the return on the invested capital and the return of the original investment. Net lettable area (NLA): defined in accordance with the PCA Method of Measurement. Pre-commitment: contract signed to occupy space in new or refurbished space prior to construction commencing. Prime: Combination of Premium and A grades. Secondary: Combination of B, C and D grades. WALE: Weighted average lease expiry. The Inner Brisbane supply pipeline has grown substantially as developers look to position themselves for the longer term. Whilst it is impossible to predict if and when all the projects will eventuate, it does indicate greater confidence in the market by the major A-REITs. The vacancy rate increased in both the CBD and Fringe office markets during the first half of The high vacancy rate is encouraging firms to consolidate multiple offices into one (often centralised) location, upgrade to higher-quality space, or move closer to the CBD. This has resulted in positive net absorption of prime CBD space at the expense of secondary CBD buildings and the Fringe market. Co-working and other flexible office space providers have been the core source of new leasing demand during 2017 to date. Rents have been largely stable over the past year, with some downward adjustment in Premium CBD rents following 480 Queen Street being fully leased. Investor demand continues to be strong, with $626.2 million of CBD sales and $438.2 million of Fringe sales during 2017 to date. m3property Valuations: Left: 545 Queen Street Right: 40 Tank Street m3commentary Spring 2017 P2

3 MARKET OVERVIEW Medium-term market fundamentals are positive for the Inner Brisbane office market, with Queensland business confidence being consistently higher than the national level and state economic growth forecast to exceed national growth over the coming decade. There have been some recent signs of strengthening in the leasing market. In the investment market, demand remains strong and yields have continued to tighten. Despite the rather gloomy net absorption and vacancy figures for the first half of 2017, conditions in the Brisbane office leasing market are starting to show signs of improvement. This year has seen the entry of co-working as a new source of demand in the Brisbane office market. Already in 2017, circa-5,600 square metres of space has been leased to new flexible office providers that previously did not have a Brisbane presence. Adding to this is circa- 10,000 square metres of active space requirements by coworking providers. Again, none of these firms are currently active in Brisbane, and therefore, any space absorbed by them will not be accompanied by any backfill requirements. However, advancing technology is changing the way businesses work. The increasing use of cloud-computing services and remote workstations has resulted in more employees working offsite and firms no longer taking expansionary space just in case. These changes are all part of an overall drive in corporate Australia towards costcutting and efficiency, which is resulting in a decline in workspace ratios that is expected to continue. Another movement in the market which we have previously flagged is WELL Certification, which measures the impact of an office environment on the health and productivity of people within it. Whilst 18 months ago, when we reported on it, only a handful of projects had registered for WELL Certification in Australia, there are now 35 registered projects and one project that has received WELL Certification (Mirvac s Sydney Headquarters). In Queensland, 480 Queen Street, Aurecon s new office at Kingsgate and Floth s headquarters in Fortitude Valley have registered for WELL certification. With a growing number of developers and asset owners looking to seek WELL certification, the Green Building Council has partnered with the International WELL Building Institute to help local buildings qualify for certification. We expect this movement to continue to gain traction (given the growing importance of employee welfare in workplaces) and that new developments will increasingly be registered to receive certification. On this note, during the past six months, there have been a number of new office projects proposed for Inner Brisbane. Developers appear to be positioning themselves for an upturn in the market. However, with yields forecast to soften, rents will need to increase in order to make new developments economically viable. Nonetheless, there is now over 300,000 square metres of stock proposed across the Inner Brisbane (CBD and Fringe) office market. In the investment market, demand remains extremely strong. The Inner Brisbane market has seen a number of significant transactions occur this year, with offshore investors continuing to have a notable presence. Investors have also been keenly acquiring core suburban assets, as evidenced by the sales of Energex s Nundah office building and the CASA building at the Brisbane Airport. Office yields have tightened further, particularly in the secondary market, however are still considerably higher than yields for comparable assets in Sydney, Melbourne and offshore, adding to investment demand. m3property Valuations: Left: Queen Street Site (with development proposal) Right: 160 Ann Street m3commentary Spring 2017 P3

4 Net Absorption Growth in Public Sector Workforce m3property Research KEY INFLUENCES $ ECONOMIC GROWTH Queensland Gross State Product (GSP) (seasonally adjusted) grew by 1.1% during the March quarter 2017, bringing annual growth to 3.6%. GSP was stronger than national Gross Domestic Product of 1.7% over the year. CASH RATE AND GOVERNMENT BOND RATES The RBA has kept the official cash rate stable since lowering it to 1.50% in August The low cost of debt remains a key driver of investor demand for commercial property assets. Low returns on government bonds have also encouraged stronger demand for acquiring property as an investment during recent years. EXCHANGE RATE While the value of the Australian Dollar has increased over the past year, it remains considerably lower than it was between mid-2009 and mid-2015, when it did not fall below US 80 cents. The lower value has been a driving force behind strong demand from foreign investors. BUSINESS CONFIDENCE National Australia Bank s index of business confidence increased to 12 index points (nationally) in July (0 = neutral). This is above the long-term average for business confidence and is favourable for future economic growth. Business confidence in Queensland is highest of all mainland states and territories at 13 index points. Confidence is a key influence behind tenant decisions to relocate, expand or contract. EMPLOYMENT The trend unemployment rate in Queensland has remained above 6.0% since December 2013 and, as at June 2017, it was 6.3%. According to BIS Oxford Economics, the Inner Brisbane stand-alone office workforce was forecast to be 174,146 persons as at June 2017, up 0.4% from June During the year, the Fringe office workforce was forecast to grow by 2.1% (largely due to Flight Centre s relocation to South Brisbane) whilst the CBD office workforce was forecast to decline by 0.5%. The size of the Queensland public sector grew by 23,924 full-time equivalent positions between June 2013 (when it reached its lowest level since 2008) and March 2017 (the latest data available). While major changes to the size of the public sector are correlated with changes in demand for office space in the Inner Brisbane office market, most of the growth in the public sector during recent years has occurred in the Health and Education sectors, both of which employ mostly front-line, rather than back-of-office, staff. 150,000 m² 125,000 m² 100,000 m² 75,000 m² 50,000 m² 25,000 m² 0 m² -25,000 m² -50,000 m² -75,000 m² -100,000 m² Public Sector Employment vs Inner Brisbane Net Absorption Net Absorption Public Sector FTE Workforce Growth * 15.0% 12.5% 10.0% 7.5% 5.0% 2.5% 0.0% -2.5% -5.0% -7.5% -10.0% Financial Year Source: Property Council of Australia. Queensland Government, m3property Note: * Public Sector FTE Workforce growth has been estimated based on growth to March 2017 quarter. m3commentary Spring 2017 P4

5 LEASING MARKET TRENDS The leasing market continues to be driven by lessees pursuit of efficiency and affordability and their requirement for end-of-trip facilities. As a result, major trends in the leasing market at present include consolidation of multiple offices into one location, centralisation, and the flight to quality / upgrading; all of which are being made possible by the high vacancy rate and affordable effective rents in the Inner Brisbane office market. CONSOLIDATION We have seen a number of companies looking to consolidate their operations into one location over recent years. The trend of consolidation is stemming from firms looking to increase efficiency and reduce costs, a trend occurring across corporate firms nationally. Firms looking to consolidate are, more often than not, consolidating multiple Fringe or Fringe and CBD offices into one CBD location. Some recent examples are noted below. QSuper currently in two CBD locations (circa-9,500 square metres) however recently reached a Heads of Agreement to take space in 300 George Street. Looking to consolidate both offices and take extra space (total of 15,000 square metres). Origin Energy currently across various buildings in Milton (21,292 square metres) and relocating to 16,000 square metres of space at 180 Ann Street in the CBD. Suncorp currently located in three CBD locations (37,860 square metres) and looking to consolidate to one location. The firm is interested in spaces ranging between 20,000 and 40,000 square metres. Allianz currently in Toowong and the CBD (total footprint of 6,433 square metres) and reportedly relocating to 8,200 square metres of space at 310 Ann Street in the CBD. Arcadis previously in two locations in the CBD and South Brisbane (totalling 1,798 square metres). Leased 1,574 square metres of space at 120 Edward Street in the CBD. Tatts Group currently in two Fringe / Suburban locations. Have leased 18,000 square metres of space at 180 Ann Street in the CBD (may look to sublease some of this space following its merger with Tabcorp). Uniting Church previously leased and owner occupied a number of offices across the CBD and Fringe. The group leased 6,300 square metres of space at 192 Street in the CBD in 2015 and is divesting previously occupied buildings (such as 180 Alfred Street in Fortitude Valley). FLIGHT TO QUALITY AND CENTRALISATION The flight to quality continues to be a key theme in the Inner Brisbane office market as a result of the affordable effective rents being offered (a byproduct of the high vacancy rate). For example, AICD recently relocated from B-grade space at 40 Creek Street to Premium-grade space at 123 Eagle Street. Queensland Treasury Corporation has also recently committed to space at 111 Eagle Street (Premium), being currently located at 123 Albert Street (A-grade). Centralisation also continues to be an important theme in the Brisbane office market. Whilst some firms are moving from the CBD to the Fringe, the overall trend in the market is firms shifting from the Fringe and Suburban markets toward the CBD. Firms currently in Suburban locations are generally looking to the Fringe market, while Fringe firms are generally looking to the CBD for relocation. With the upper level of A- grade Fringe rents being broadly equivalent to the lower level of A- grade CBD rents, it is no surprise that Fringe-based firms are considering relocation to the CBD upon lease expiry. Some examples of firms who have relocated / are looking to relocate include Avant Mutual Fringe to CBD; BGC Contracting Suburban to Fringe; Ellivo Architects Fringe to CBD; and Origin Energy Fringe to CBD. Whilst the CBD s secondary market has benefited from smaller Fringe firms relocating to this market, the space absorbed as a result of these relocations has been nominal. FLEXIBLE OFFICE SPACE PROVIDERS Whilst the Brisbane office leasing market has not had any major drivers of expansionary demand during recent years, the first half of 2017 has seen demand from a relatively new (to Brisbane) type of tenant strengthen considerably. Flexible office space providers were fairly non-existent in the Brisbane market 12 months ago, however these firms are now actively taking, and looking for, space. Already signed this year is Christie Offices, leasing 3,500 square metres of space at 240 Queen Street, and Fishburners and Little Tokyo Two at 155 Queen Street (2,108 square metres). Current space requirements include We Are Connected, a new Australian business looking for 3,000 to 4,000 square metres; Clear Edge Offices (800-2,000 square metres) and naked Hub, (1,500 to 3,000 square metres). Furthermore, Hub Australia is reported to be looking to take 3,500 square metres of space at 200 Adelaide Street. The space absorbed from these flexible office space providers is / will be a boost to net absorption, given the firms currently do not have a Brisbane presence. m3commentary Spring 2017 P5

6 KEY INDICATORS STOCK AND SUPPLY According to the Property Council of Australia, there was 2,279,725 square metres of office space in the Brisbane CBD as at July 2017, representing the third largest CBD office market in Australia. The Fringe market comprised of 1,219,642 square metres of office space, being the largest nearcity office market in Australia. Additions While the Inner Brisbane residential market is now regarded as being in a downturn, conditions in the Brisbane commercial leasing market are perceived to have improved. As a result, some sites that were earmarked, or previously sold / under contract to sell, for residential development (such as 545 Queen Street) are now remaining as office accommodation for the near future. It is our view that the office development market is at the start of Inner Brisbane Supply Projects an upswing. Developers are now acquiring and looking to acquire sites in order to position themselves in the Brisbane office market over the longer term, recognising the high price that investors are paying for new office assets. Sites with development potential, that also provide holding income, are in strong demand. This is evidenced by Charter Hall and Investa s acquisition of Queen Street, paying a record $24,977 per square metre of site area. Whilst 12 months ago (when leasing conditions were weaker), the supply pipeline for the Inner Brisbane office market did not realistically extend far beyond the buildings under construction, there have been a number of new office buildings proposed over the past year. The bulk of new supply proposed has been for the Fringe market, more specifically, the Urban Renewal sub-locale. However, developers looking at the Fringe are expected to continue to face the challenge that the relative affordability of the CBD rental market poses for securing tenant precommitments. Withdrawals The trend of office buildings being withdrawn to be converted to residential / student accommodation appears to have now run its course. There are three office buildings to be withdrawn from the CBD market over the coming year, being the Health, Forestry and Primary Industry Houses (41,100 square metres). A development application has also recently been submitted for the demolition of Suncorp Plaza (20,603 square metres) and the construction of a new 43,000 square metre Premiumgrade office building in its place. In the Fringe market, 230 Brunswick Street (Transport House) was recently withdrawn from the market following the State Government s relocation to the CBD earlier this year. Transport House will undergo a full refurbishment during Address NLA Developer / Owner Status CBD 310 Ann Street, Brisbane. 18,640 m² Cornerstone Properties Full refurbishment. Under construction Reported to be 44% committed to Allianz. 300 George Street, Brisbane. 58,210 m² Shayher Group Under construction HOA to QSuper (circa-26%). 150 Elizabeth Street, Brisbane. 35,000 m² Brookfield Multiplex / ISPT DA approved. The Annex, 20 Creek Street, Brisbane. 6,600 m² Dexus DA approved. 143 Turbot Street Street, Brisbane. 43,000 m² Morris Property Group DA applied. 320 George Street, Brisbane. 8,000 m² Lionmar Holdings DA applied Queen Street, Brisbane. 43,000 m² Charter Hall / Investa Mooted. 80 Ann Street, Brisbane. 55,000 m² Mirvac Mooted. Fringe 900 Ann Street, Fortitude Valley. 18,790 m² Charter Hall / Consolidated Under construction % pre-committed to Aurizon. K5, 25 King Street, Fortitude Valley. 14,430 m² Lendlease / Impact Under construction % pre-committed to Aurecon. 11 Breakfast Creek Road, Newstead. 24,300 m² Charter Hall / John Holland DA approved. 16% pre-committed to John Holland. 230 Brunswick Street, Fortitude Valley. 11,000 m² LaSalle DA approved. Construction to start early Alfred Street, Fortitude Valley. 35,000 m² LaSalle DA approved. CDOP 7, 45 Little Cribb Street, Milton. 27,800 m² AMP / Sun Super DA approved. K3, King Street, Fortitude Valley. 10,300 m² Lendlease DA approved. 801 Ann Street, Fortitude Valley. 44,950 m² Walker Corporation DA applied. 949 Ann Street, Fortitude Valley. 13,630 m² Kenlynn Projects DA applied Montepelier Road, Bowen Hills. 36,000 m² OPD DA applied. 301 Wickham Street, Fortitude Valley. 33,800 m² Cornerstone Properties DA applied. Source: m3property m3commentary Spring 2017 P6

7 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun m3property Research KEY INDICATORS 100,000 m² 75,000 m² 50,000 m² 25,000 m² 22.5% 20.0% 17.5% 15.0% 12.5% 10.0% 7.5% 5.0% 2.5% 0.0% 0 m² -25,000 m² -50,000 m² -75,000 m² Brisbane CBD Office: Net Absorption Net Absorption 20-year Average 10-year Average 5-year Average Financial Year Source: Property Council of Australia, m3property 80,000 m² 60,000 m² 40,000 m² 20,000 m² 0 m² -20,000 m² Brisbane Fringe Office: Net Absorption Financial Year Source: Property Council of Australia, m3property Vacancy Rate Source: Property Council of Australia, m3property Net Absorption Long-Term Average 10-yr Average 5-Year Average CBD Prime CBD Secondary Fringe Prime Fringe Secondary NET ABSORPTION AND VACANCY The latest figures from the Property Council of Australia show both the CBD and Fringe posted negative net absorption and an increase in the vacancy rate during the first half of CBD net absorption during the 2017 financial year was 41,749 square metres. Some net absorption was the result of Fringe and Suburban tenants relocating to the CBD as well as take-up from flexible office space providers. However, as noted in our Autumn m3commentary, the strong net absorption figure was also significantly boosted by the temporary increase in occupied space by the State Government during the second half of 2016 (due to holding additional space while fitouts and relocations were completed). This is now starting to be returned to the market (Health House is now fully vacant). The net absorption figure for the first six months of 2017 / second half of the financial year (-8,299 square metres) partly reflects this correction in the State Government s occupied space that we expected to occur. Net absorption of -8,299 square metres during the first half of the year resulted in the overall CBD vacancy rate increasing to 15.7% over this period. Net absorption was positive in the prime market and resulted in Premium and A-grade vacancy rates declining to 11.8% and 11.6% respectively. This occurred as a result of Fringe tenants relocating to the CBD and firms previously in secondary-grade CBD buildings upgrading to higher quality space. Unsurprisingly, net absorption was negative in the secondary market and the vacancy rate for the secondary market increased from 19.4% to 20.6% over the first half of As at July 2017, there was over 211,000 square metres of vacant secondary-grade stock in the CBD. In the Fringe market, net absorption during the first half of the year was -28,553 square metres. The Fringe vacancy rate increased to 14.4% (from 12.9%) during this period. Contributing to this was the State Government s relocation out of Transport House in Fortitude Valley to the CBD (11,000 square metres, which has since been withdrawn). Also during this period, Arcadis moved from South Brisbane to the CBD (leaving 1,110 square metres of space) and the Australian Federal Police relocated from Spring Hill to Newstead, also downsizing their footprint by 583 square metres. By sublocale, vacancy remains highest in Spring Hill (18.4%) and Milton (17.9%). The CBD and Fringe vacancy data provide evidence of the leasing trends noted previously in this report, with prime vacancy in the CBD declining at the expense of the secondary CBD and Fringe markets. As at July 2017, across the CBD and Fringe, there was 532,910 square metres of vacant space, of which 57.1% was secondary-grade. This amount of space is almost equivalent ten 480 Queen Streets. m3commentary Spring 2017 P7

8 Billions m3property Research KEY INDICATORS $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $1.47 Fringe B-grade CBD B-grade Fringe A-grade CBD A-grade CBD Premium $ %-6.00% $2.24 Inner Brisbane Office Yields 6.25%-7.25% 5.75%-7.00% $2.33 $ %-8.50% 7.00%-8.25% $1.06 $ * Note: * Sales over $5 million to end July % 9.0% 8.0% 7.0% 6.0% 5.0% Inner Brisbane Office Sales CBD Fringe 5.0% 6.0% 7.0% 8.0% 9.0% Contraction in Inner Brisbane Office Yields 6.00%- 9.50% 5.00%- 8.25% 6.50%- 9.50% 6.25%- 8.50% Dec-15 Qtr Jun-17 Qtr Dec-15 Qtr Jun-17 Qtr RENTS AND INCENTIVES The Inner Brisbane office leasing market continues to be a tenant s market. In the CBD, gross face rents are averaging $825 per square metre for Premium-grade space, $650 per square metre for A-grade space and $540 per square metre for B-grade space. Incentives are averaging 36% for Premiumgrade, 35% for A-grade and 39% for B-grade space. In the Fringe market, gross face rents currently average $560 per square metre for A-grade space and $420 per square metre for B-grade space. Incentives average 35% for A-grade space and 36% for B-grade space. The Inner South and Urban Renewal sub-locales typically achieve higher effective rents than the traditional Fringe sub-locales. Whilst the vacancy rate is lower in the Fringe than the CBD, Fringe landlords are having to keep up with the incentives being offered in the CBD market in order to retain / attract tenants. INVESTMENT MARKET AND YIELDS There has been strong demand for investment stock in the Brisbane office market during recent years. While forecast rental growth is usually an important driver, the Brisbane office leasing market has been far from supportive of investment demand during recent years. Despite this, investment demand has outweighed supply and yields have contracted considerably. Driving the investment market has been the low 10-year Government Bond Rate, with investors looking to property to generate higher returns on investment. Adding to this has been demand from offshore investors (who see Australia as hosting relatively high-yield investment opportunities in a stable-policy environment) and investors who have been pushed out of southern markets. The volume of transactions recorded in the Inner Brisbane office market totaled $1.66 billion during During 2017 to date, we are aware of $1.06 billion of sales that have settled. Whilst demand is strong, some vendors are holding onto assets due to not being able to identify alternative, higheryielding, investment opportunities. As a result, purchasers have increased their risk exposure in order to enter the market / expand their market share, with the majority of sales over the past 18 months being of secondary-grade assets. CBD yields currently typically range between 5.00% and 6.00% for Premium assets, 5.75% and 7.00% for A-grade assets and 7.00% and 8.25% for B-grade assets. Fringe yields typically range between 6.25% and 7.25% for A-grade buildings and 7.25% and 8.50% for B-grade buildings. Inner Brisbane office yields have continued to tighten during 2017, albeit at a slower rate than seen during CBD Fringe m3commentary Spring 2017 P8

9 SIGNIFICANT SALES Property Date Price NLA NLA Analysis WALE (income) EMY CBD 160 Ann Street, Brisbane. Jul-17 $119,500,000 15,984 m² $7,476/m² 9.55 yrs 6.30% Queen Street, Brisbane. Jun-17 $53,750,000 2,152 m² (Site Area) $24,977/m² (Site Area) 120 Edward Street, Brisbane. May-17 $142,650,000 15,271 m² $9,341/m² 3.60 yrs 6.14% 50 Ann Street, Brisbane. May-17 $144,620,000 25,519 m² $5,667/m² 3.61 yrs 7.96% 40 Tank Street, Brisbane. Apr-17 $56,100,000 6,218 m² $9,022/m² 7.24 yrs 6.54% 545 Queen Street, Brisbane. Mar-17 $70,500,000 13,581 m² $5,191/m² 1.72 yrs 7.63% Fringe 189 Coronation Drive, Milton. Jul-17 $17,500,000 2,657 m² $6,586/m² 3.90 yrs 7.11% 520 Wickham Street, Fortitude Valley. Jul-17 $119,149,000 14,585 m² $8,169/m² N/A 6.75%-7.00%* 200 Creek Street, Spring Hill. Jan-17 $38,700,000 7,603 m² $5,090/m² 3.82 yrs 8.54% 505 St Pauls Terrace, Fortitude Valley. Jan-17 $205,500,000 17,618 m² $11,664/m² yrs 5.77% Source: m3property Note: * Reported. Please contact us for a detailed analysis of any of the above sales. SALE ANALYSIS: QUEEN STREET DETAILS OF SALE Address Queen Street Sale Price $53,750,000 $/m² Site Area $24,977 Sale Date June 2017 Vendor Martel Pty Ltd Blackstone Group & Clive Palmer Purchaser Charter Hall & Investa N/A N/A LOCATION AND DESCRIPTION The site is located within the traditional Uptown precinct of the Brisbane Central Business District, approximately 300 metres north-east of the entrance to the Queen Street Mall and approximately 400 metres south-east of the Central Railway Station. The property is located in close proximity to the financial district and a variety of restaurants and bars along the Brisbane River waterfront. A wide range of office and retail, including the Queen Street Mall, are located within the immediate area. The land comprises a level, near-regular shaped, site, incorporating four lots over three separate titles, totalling 2,152 square metres. It has main frontage to Queen Street and rear Griffin Lane frontage. The land is improved with three older-style buildings comprising a total lettable area of 9,942 square metres, incorporating retail and office space ranging from a low C- grade to B-grade accommodation standard, and includes 54 secure car parks. COMMENTS The site is a relatively large, office redevelopment site in a premium location generating holding income. The site was sold without development approval. A redevelopment scheme has been prepared for a 43 storey, Premium-grade office tower incorporating three basement levels for a total of 220 bays, ground retail space, three podium office space levels, office tower over levels five to 39 and roof and plant area on level 40. The proposal has a total GFA of 56,036 square metres and NLA of 43,420 square metres. m3commentary Spring 2017 P9

10 OUTLOOK INNER BRISBANE OFFICE Whilst conditions in the Brisbane office leasing market have started to improve, the market is still to be tested when the State Government returns further unoccupied space to the market. We expect this to occur sometime over the coming six months. The outlook for prime CBD space is positive, with low effective rents continuing to encourage firms in secondary CBD space to upgrade and Fringe firms to relocate. Face rents are expected to be relatively stable over the near term and landlords are expected to continue to offer large incentives. The first signs of rental growth will be in the prime CBD market, which has seen vacancy decline over the past year. Vacancy in the Fringe is expected to remain at elevated levels (and increase further) over the short term, with Origin and Tatts still to relocate. There has been a considerable amount of new supply proposed for Inner Brisbane during the past six months. Any new developments are likely, however, to occur in a softer yield environment. Because of this, the economic rent required for these developments to be feasible will need to be higher. We therefore expect new proposed developments to be delayed until the recent improvements in the leasing market translate into rental growth. We do not expect this to be far away, with conditions in the prime CBD market improving over the past year. We suspect that new proposed developments in the Fringe market will, however, struggle to get off the ground in the near future. The CBD is now attracting most major tenant space requirements and this is unlikely to change in the short-term. Over the medium-term, as vacancy declines further in the CBD and rents start to increase, we expect the Fringe to see more prospective tenant attention which will then provide the catalyst needed for new development. The strong pipeline of infrastructure and amenity projects for South East Queensland is expected to be a positive source of demand for the Brisbane office market. The next decade will see the Brisbane skyline change dramatically and the city is increasingly being seen by major institutions, start-up firms and offshore groups as a core Australian office market. Furthermore, economic growth in Queensland is forecast to outperform national economic growth over the long-term and State business confidence continues to exceed national business confidence. Over the medium-term, the Australian Government forecasts strong national growth in the number of Information and Communications Technology; Business, Human Resources and Marketing; and Design, Engineering, Science and Transport professionals. Tradeexposed sectors such as Tourism and Education are also expected to continue benefiting from the value of the Australian dollar, resulting in potential growth opportunities for these sectors. Focussing on Brisbane, demand from the Engineering Sector is expected to strengthen given the number of major construction projects planned. However, we expect national office markets to increasingly be faced with declining workspace ratios a result of corporate Australia s growing trend towards efficiency and cost-cutting. The sharing of work stations, minimisation of occupancy costs and reluctance to take on expansionary space are all trends we expect to continue. In the investment market, yields are expected to tighten marginally during the remainder of 2017 and then remain stable during The relative spread between property yields and the 10-year government bond rate will, however, continue to encourage investment into property. Over the medium-term, yields are forecast to soften alongside further increases in the bond rate. Over the coming decade, Brisbane office IRRs are forecast to exceed both Sydney and Melbourne. KEY COMMERCIAL VALUATION CONTACTS Ross Perkins Michael Coverdale Managing Director QLD Associate Director QLD (07) (07) Simon Hickin Andrew Duguid Director SA Managing Director NSW (08) (02) info@m3property.com.au m3property provides national coverage in all States and Territories. Andrew Duguid Managing Director NSW (02) Gary Longden Director VIC (03) DISCLAIMER m3property Australia. This report has been derived, in part, from sources other than m3property. In passing on this information, m3property makes no representation that any information or assumption contained in this material is accurate or complete. To the extent that this material contains any statement as to the future, it is simply an estimate or opinion based on information currently available to m3property and contains assumptions which may be incorrect. m3property makes no representation that any such statements are, or will be, accurate.