The Brisbane CBD is facing an unprecedented space squeeze with the supply of new office towers drying up amid rising demand and rents heading towards $2000/sqm.
The only office tower coming out of the ground – following the recent completion of the $700m 33-storey 360 Queen St development – is the 49-level North Tower, as part of Dexus’ $2.5bn Waterfront Brisbane, expected to be built by late 2028.
Charter Hall office chief executive Carmel Hourigan said the lack of office towers being built in major Australian cities was a fundamental challenge.
“You can look out on the horizon at the east coast of Australia and – putting aside what’s under construction now – there’s hardly any new supply coming on,” she said.
“That will be the game changer, no matter what happens to demand.”
The major issue is the increasing risk equation for developers who build the towers with a range of issues surfacing at the same time.
Cost escalations, a slow planning regimen and excess red tape, financing issues, a lack of confidence in the market, union concerns, productivity problems, a lack of workers and available development sites in the CBD are just some of the risks that developers have to negotiate while planning and building the massive towers.
However, Brisbane faces its own specific challenges with Queensland’s multi-billion dollar infrastructure ambitions and the 2032 Olympic Games producing labour shortages.
In turn, builders are absolutely spoiled for choice and are turning down jobs.
Charter Hall regional development and portfolio director Bradley Norris said with all the risk factors, the choice between public construction work and the private sector has widened and builders have been knocking back non-government work.
Construction workers are also spoiled for choice creating a labour shortage.
The latest Construction Skills Queensland Horizon 2032 report predicted an average shortfall of 19,100 workers over the next seven years, and forecast a 35,000 workforce shortfall in the construction sector within two years as the state enters a building super cycle on the way to the 2032 Olympics.
“Workers will go where there’s less risk if they’re looking at the choices between government infrastructure work or private work,” Mr Norris said.
“The same thing for builders who want to de-risk and will be more selective on what jobs they will take on.”
The construction of 360 Queen St was by any measure a success, with the tower in the Golden Triangle, pushing the development envelope offering a state-of-the-art asset complete with plush offices, wellness centre, a retail laneway, conference centre, cafes, special spaces and more.
Yet, it was still 12 months behind schedule having to cope with design issues, the Covid pandemic, cyclones, floods as well as cost escalations.
Investa chief executive Peter Menegazzo described the development as a “survival story”.
“We were just coming out of Covid and so there were still a lot of questions about what was going to the office market in the longer term and there was a lot of risk involved,” he said.
Commercial property agency JLL’s latest research shows Brisbane businesses face the tightest office market in a decade, with prime vacancy at 8.6 per cent and effective rents up by 11 per cent over the past 12 months.
However, it has been a lot worse.
Back in 2008 the Brisbane CBD office vacancy was sub 1 per cent but there was a wave of new office towers that came on line which helped absorb demand and reduce rents.
The difference is that there’s only one new office tower coming out of the ground, which is complemented by the redevelopment or repurposing of the 50-year-old former 24-storey Public Trustee building at 450 Queen St into a A-grade tower that will open its doors early next year.
Savills state managing director Matt Kearney said over the next five years will be the lowest period of commercial office supply ever in the Brisbane CBD.
He said it will be “very tight” in the premium and A grade segment, with 40 whole floors leased or committed in the CBD over the past six months.
“We only have 18,000 sqm of new supply next year at 450 Queen St and 73,000 sqm at Waterfront Brisbane North Tower at the end of 2028 of which 70 per cent is already pre-committed. This is not enough supply to sustain forecast demand from occupiers,” he said.
He said that rental growth in the Brisbane CBD is the fastest in Australia with rents soaring past $1500/sqm for premium office space and expected to past $2000/sqm by the end of 2029.
“We’ve seen 40 per cent rental growth over the past five years and there are no signs of this subsiding, given the economic story and momentum behind Brisbane and our region,” Mr Kearney said.
However, the development industry has a long history of adaptation and one remedy to the CBD’s supply woes might not be new buildings but repurposing older ones.
Colliers latest research report Brisbane 2032 Olympic and Paralympic Games: Creating Solutions, said that retaining foundations and structural frames not only cuts costs by up to 20-25 per cent and halves the delivery time frame but will also help meet the booming demand for office, mixed-use, and residential space ahead of the Games.
Colliers Queensland chief executive Simon Beirne said construction costs, labour shortages, and declining productivity have all contributed to placing significant pressure on new development projects and, therefore, the level of new supply entering the market.
The Midtown Centre at 155 Charlotte St opened in 2021 after two 1980s government office towers – Health and Forestry House – were joined to create a into a 26-storey A Grade office building, cutting construction costs by 25 per cent and turning a $66m acquisition into a $660m institutional-grade asset.
FPGIM Real Estate will unveil a $300m redevelopment of 450 Queen Street early next year and an obsolete commercial building, 41 George St is being converted from a 1979 built, 27 storey, 29,660 sqm B grade office tower, home to the Queensland Government for 43 years, into a 1180-bed student accommodation facility.
“With the CBD geography limiting new development and demand climbing as the Games approach, Colliers research identifies solutions. There are many buildings that could be adapted into hotels or student accommodation,” Mr Beirne said.
“Adaptive reuse isn’t just a clever solution, it’s fast becoming a smart strategy for developers aiming to capitalise on the demand we are seeing from the Games in the limited time frames we have.”