BRISBANE'S commercial property market performed at five times its historical average in the six months to 31 December as the city's vacancy rate dropped from 16.9 per cent to 15.3 per cent, according to the latest Property Council's Australian Office Market Report.

This result has come despite, or perhaps because of, the Queensland Government's move to its new premises at 1 William Street.

The Gold Coast also performed well, reducing its vacancy rate from 14.3 per cent to 12.2 percent off the back of a thriving tourism industry and 2018 Commonwealth Games preparations. Net absorption on the Gold Coast was 4,860 sqm, marking the seventh consecutive year of positive absorption.

Despite this improvement, South East Queensland vacancy rates remain historically high and the region is underperforming against the major east coast capitals, Sydney (6.2 per cent) and Melbourne (6.4 per cent).

Chris Butters, CBRE Queensland state director, advisory and transaction services, says the Brisbane market performed well above expectations in 2016, which were pegged at around a 17 per cent vacancy rate for the year.

He says that Brisbane's vacancy rate improvement was largely due to State Government growth (with public sector employment now at record levels) and the impacts of the Government's move to 75,000sqm of space at 1 William Street, which resulted in a shuffle between more than 20 assets.

"It appears that the resultant backfilling of space by the government and supplementary requirements has boosted the second half year absorption numbers significantly."

But the Government is not the only a-list tenant on the move in the city. Telstra has entered a long-term lease for 30,000 sqm at 275 George Street and 69 Ann Street, which was the biggest commercial leasing deal carried out in Brisbane last year.

Butters says the lower Australian Dollar has also supported tenant demand from the education and training sector in Brisbane, as well as benefiting industries including tourism and agriculture.

"Throughout 2016, a significant quantity of sub-lease space transacted in Brisbane with tenants housed in secondary assets taking the opportunity to upgrade into fitted premium accommodation at discounted rentals," he says.

"With the majority of development-led lease tails now absorbed, and the contractionary phase of the cycle well and truly past, Brisbane has trended back to a predominantly direct vacancy market."

Butters says the result was "out of kilter" with the underlying occupier demand, and it was driven by the State Government.

"While private sector demand is slowly improving, there remains a strong focus on efficiency and cost containment," he says.

"We expect this trend to continue in 2017, although with the State Government shuffle now largely through the system, net absorption will likely still be positive although more modest. Given the minimal supply pipeline for the next couple of years, vacancy should continue to trend down."

Overall, the Australian CBD office vacancy rate remained steady over the six months to January 2017, falling from 11 per cent to 10.9 per cent.

While Sydney, Melbourne and South East Queensland performed well, Darwin (22.5 per cent), Adelaide (16.2 per cent) and Perth (22.5 per cent) are continuing to struggle.

The report shows that Australian CBD markets will have 462,000 sqm of space come online in the next three years, around half the new supply that CBD markets have experienced over the past 18 months.

There has been 505,866 sqm added Australia-wide just in the past six months - 60 per cent above the historic average. On the flip side, there was 373,335 sqm withdrawn over the period, which is more than double the historical average of 152,421 sqm.

"This pace will not continue during 2017 and 2018. We expect the amount of additional office space across Australia during 2017 and 2018 to be less than half the historic average (293,697sqm in 2017 and 268,798sqm in 2018)," says Ken Morrison, CEO of the Property Council of Australia.

"For cities like Sydney and Melbourne it is likely to mean pressures on rents, and in cities like Darwin and Perth which have extraordinarily high vacancy rates, it will mean a welcome reprieve for property owners."

CBRE Australian head of research, Stephen McNabb says, "We expect the divergence between market performance may narrow somewhat, but this will be very gradual and the south east markets still stand out as the tightest in the country."

On the Gold Coast, healthy demand for office space has caused vacancy rates to fall over the final half of 2016 to 12.2 per cent.

"Gold Coast recorded one of sharpest declines in vacancy across all Australian office markets over the second half of 2016," Queensland executive director of the Property Council, Chris Mountford, says.

"With the exception of D-Grade buildings, vacancy levels on the Gold Coast have dropped across all office grades and in nearly all locations.

"While there have been some office buildings withdrawn from the market for redevelopment, new demand is playing the major role in bringing down the vacancy rate."

The Gold Coast has kept pace with similar declines in the Brisbane CBD and Brisbane Fringe office markets, which have recorded 15.3 and 12.6 percent vacancy respectively.

"While it is positive to see demand and withdrawals keeping pace with new supply over 2016, Queensland is still experiencing historically high office vacancy," says Mountford.

CBRE's associate director, advisory and transaction services office on the Gold Coast, Nick Selbie, says net absorption will continue in the city through 2017.

"3,700sqm of sub-lease space in Robina has reached agreement, while the A-grade market will also show absorption on the back of very strong leasing activity at 50 Cavill Avenue, Surfers Paradise."

CBRE expects business confidence to remain positive over the next 12 months with preparations continuing for the Commonwealth Games, stage 2 of the Light Rail progressing through its construction phase, record breaking tourism figures and sustained activity in the residential development market.

"As the vacancy rates continue to trend towards 10%, the supply side of the market is beginning to activate with discussion being held on a number of speculative developments. There has been very limited supply over the past five years, which has resulted in the consistent decline in vacancy," says Selbie.

Business News Australia

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