In the latest sign that the commercial building sector is joining residential building in driving forward momentum in the Australian construction industry, a widely respected measure of building industry conditions throughout the country indicates that the sector expanded at its fastest pace in almost four years last month, albeit with overall construction activity having contracted during the month amid weaker conditions in apartment building and civil construction.

Published jointly by the Australian Industry Group (Ai Group) and Housing Industry Association (HIA), the Australian Performance of Construction Index (Australian PCIᶱ) dropped 4.0 points in February from 48.2 to 44.2.

This means overall conditions within the construction sector (seasonally adjusted) deteriorated during February (any reading below 50.0 indicates deteriorating conditions overall) and did so at a slightly faster pace compared with January.

That headline figure, however, masked encouraging signs within the commercial sector, where the index rose 12.9 points to 59.9 and which has recorded expanding conditions over several of the past six months following a number of years of prolonged weakness (see chart).

Recent months have seen increasing signs of rising expectations within the sector as well as anecdotal evidence of more projects coming online.

Earlier this week, for example, supermarket giant Coles unveiled plans to spend $1.1 billion over the next three years building 70 new stores around the country – a move the company estimates will create around 8,200 retail construction jobs whilst the stores are being built.

australian construction activity by sector

Despite stressing it was too early to call a commercial building recovery, Ai Group Executive Director of Public Policy Peter Burn says improving conditions in this sector are being underpinned by a combination of growing confidence and a less restrictive financing environment, which was seeing previously shelved projects coming out of the woodwork.

Burn told Sourceable that super funds are becoming less pessimistic and investing more in commercial property whilst companies themselves had built up considerable levels of cash reserves in recent years.

“There’s a fair bit of money flowing around compared with a year ago” Burns said.

“Combine that with (increasing) confidence and away we go.”

Outside of the commercial sector, meanwhile, the house building sector recorded its sixth consecutive month of expansion.

Conditions deteriorated, however, in apartment building and engineering construction.

Notwithstanding the decline in the overall index, HIA Chief Economist Harley Dale said readings for housing and commercial building were ‘encouraging’ and that increasing signs of strength in home building augur well for the domestic economy this year.

In other findings, according to the report:

  • New orders (39.5) contracted for a second consecutive month.
  • Employment (44.6) also continued to contract.
  • Profit margins remain under pressure as selling prices (46.0) continue to fall even as input costs (66.4) and wages (58.4) continue to rise.