Last October, Cbus Property turned the first sod on what it says will be a landmark ‘vertical village’ in Melbourne’s CBD featuring two twin 39-storey vertical towers joined by a skybridge in a multi-use development which will house office and retail space as well as a hotel and apartments at its $1 billion Collins Arch building.
Cbus is not alone. Later this year, Lend Lease hopes to break ground on its $1.6 billion 50-storey Circular Quay tower, which will house 5,500 workers in Sydney.
In retail, Stonnington City Council recently approved a $500 million overhaul of the iconic Jam Factory entertainment complex in Chappell Street, South Yarra (Melbourne). Brisbane’s $3 billion Queens Wharf project broke ground in March.
As the apartment boom wanes, non-residential construction in Australia is emerging as a significant area of opportunity. In its latest forecasts, Australian Construction Industry Forum (ACIF) said it expects the dollar value of work on commercial and non-residential building to grow by 12.1 per cent this financial year to go from $37.062 billion in 2016/17 to a record $41.533 billion in 2017/18. Going forward, ACIF expects further growth of 3.4 per cent during the coming financial year, during which the value of work will reach $42.9 billion.
Confidence is sky-high. In the June quarter edition of the Property Council of Australia’s Property Industry Confidence Survey, more than 1,000 developers, owners, agents, managers, consultants and government respondents expressed greater optimism for 12-month construction activity compared with any other time in the survey’s seven-year history across each of the sectors of offices, industrial, hotels and retirement living.
Economic conditions are helping. In the current calendar year, the Reserve Bank of Australia expects growth in GDP to rise above three per cent for the first time since 2012. Near-term interest rates, commentators say, will remain at accommodative levels.
Moreover, property fundamentals are strong. Office vacancies across both Sydney and Melbourne sit at less than five per cent (Property Council, Jan 18). Thanks to stronger tourism numbers, hotels in Sydney, Cairns, Melbourne and Hobart are more than 80 per cent full (CBRE). Demand from an aging population means places in aged care and retirement living are tight.
New work is coming in fast. On a seasonally adjusted basis, the dollar value of commercial/non-residential buildings approved for construction over the six months to March came in at $22.817 billion – a 35 per cent increase compared with the same period three years earlier.
Speaking at the launch of the ACIF report during the recent Design Build expo in Melbourne, Kerry Barwise, principal economist at Barwise Consulting and head forecaster for ACIF, described several shifts across the broader construction sector.
In recent years, he said, the boom in residential building and road construction had picked up the slack as resource investment waned. Now that residential and especially apartments are past their recent peak, opportunities are shifting to commercial. In civil, road and rail construction remain in the midst of a multi-year boom.
In commercial building specifically, Barwise says momentum is being driven by growth in service related sectors of the economy such as health, education, professional services, tourism and food and entertainment. This, he said, would underpin growth in opportunities across multiple subsectors. Hotels are undergoing a ‘room boom’ and are being constructed at levels faster than those seen in the lead-up to the Sydney Olympics. Education is continuing to lift. Non-residential building approvals more broadly are surging.
“What’s been growing in the Australian economy?” Barwise asked the audience. “Services. Services, services and services. Health, professional services, education, accommodation – building out all those hotels and accommodation facilities as well as cafes and restaurants.”
Other commentators agree.
Speaking from a builder’s point of view, Hickory Group joint managing director Michael Argyrou told the ACIF breakfast that the forecasts are broadly consistent with what his company is seeing on the ground, especially in new offices and hotels.
Whilst this is positive, Argyrou said it is creating challenges as commercial and apartment builders compete with the booming civil sector for skills and labour.
Argyrou disagrees, however, about the extent of slowdown in apartments. In Hickory’s case, he says the company is still seeing strong demand coming through.
Eliza Owen, senior commercial real estate analyst at CoreLogic, said the upturn in commercial building is being driven by several factors. In education, she says the apartment building boom has helped spur demand for social infrastructure such as vertical schools for people who will live in these spaces. In the office sector in Sydney, there are opportunities to upgrade space away from the water’s edge. As well, she said Sydney is realising that it needs ‘more than beautiful apartment views’ to maintain its international reputation. This includes pleasing architectural space and an embrace of technology.
In terms of commercial sectors, according to ACIF:
- Offices will be the biggest area of growth, with activity surging from $5.226 billion in 2016/17 to $7.016 billion in 2018/19 before further rising to more than $7.5 billion in 2021/22. Growth will be concentrated in New South Wales, Victoria and the ACT, where demand for space is robust and where – in the case of Sydney and Melbourne – vacancy rates are less than five per cent.
- Driven by a sustained upturn in tourism and a lack of quality stock thanks to a previous investment drought after the GFC, the dollar value of work done in building hotels and other accommodation facilities has almost tripled over the past four years from $1.1 billion in 2013/14 to a forecast $3.118 billion in 2017/18. Going forward, activity is set to keep rising to a peak of $3.501 billion in 2020/21. Growth will be widely spread across most parts of the country.
- Thanks largely to a number of stations and other buildings associated with significant public investment in transport infrastructure, Other commercial (transport buildings, commercial car parks and the like) is also set for a big jump from $1.115 billion in 2016/17 to $1.78 billion in 2017/18 before peaking at$1.621 billion in 2018/19.
- Despite the success of Amazon, work on retail/wholesale trade facilities is in the midst of a two-year growth spurt from $6.520 billion in 2016/17 to a peak of $7.394 billion in 2018/19. Growth will be concentrated in Victoria and Western Australia – despite the latter being impacted by subdued economic conditions.
- Activity in warehousing and industrial is undergoing a three-year growth spurt which should see the value of work done grow from $4.8 billion in 2015/16 to almost $6 billion in 2018/19. Most of the activity will be centred around NSW, Victoria and Queensland amid a good range of significant dollar value projects in those sectors.
- Thanks to a solid pipeline in university and school projects across most of the country, the value in work done education has risen from $4.421 billion in 2015/16 to a forecast $5.750 billion in 2017/18. It is expected to reach more than $6 billion in 2018/19 and remain above that level in following years.
- A temporary spike is also underway in miscellaneous projects (buildings relating to religion, justice, community service, defence and so forth), where the value of work has shot up from an $2.064 billion in 2015/16 to $3.281 billion in 20187/18. Activity is widespread and is being driven by work on significant dollar value developments in military facilities and prisons as well as a few projects in law courts and community service facilities.