Commercial Construction Growth Running Out of Steam

Monday, December 15th, 2014
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A temporary spurt of growth in the market for new office construction in Australia appears set to peter out amid growing signs that the volume of new work coming in is slowing.

Having remained virtually stagnant over recent years, the dollar value of construction work done on commercial office buildings throughout the country is expected to increase from around $5.812 billion in 2013/14 to a healthy $6.815 billion in 2014/15.

Work on several towers at Barangaroo as well as new construction and renovations on towers in George Street is expected to power activity in Sydney and that on projects such as 1 William Street, Queen Street Office Tower and the Regent Theatre Office Tower will power up work in Brisbane, according to forecasts from Australian Construction Industry Forum (ACIF).

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That, however, is a result of projects which were in the pipeline several years ago. Now, things appear to have slowed. At $3.8 billion, the overall dollar value of new office buildings approved for construction throughout the nation in the first 10 months of this year was lower than during the previous corresponding period in any of the past five years. Furthermore, ABS data for future expected capital expenditure indicates that the pipeline of investment in buildings and structures in non-mining and non-manufacturing sectors is at relatively modest levels.

Because of this, while nobody expects an actual decline in activity, longer term sentiment is not high, with forecasters such as ACIF and BIS Shrapnel expecting little or no growth across all states beyond the current financial year for at least the next few years.

Participants in the Property Council of Australia’s most recent Property Industry Confidence Survey are also less confident about construction activity growth prospects over the next 12 months in the office sector than they are for any other sector included in that survey.

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Reasons for this are not difficult to understand. Employment growth in white-collar sectors such as finance and information technology, which are traditional users of office space, has been modest at best over recent years, while the resources slowdown has seen demand plummet and vacancy rates sky-rocket in cities such as Brisbane and Perth.

Combine this with a broader trend toward working outside of the office along with a general push to get more value from existing space as opposed to adding new space, it is hardly surprising that national office vacancies are now sitting at 10.7 per cent or that participants in recent Property Council and NAB surveys expect virtually no near term growth in either rents or capital value.

Add to that IMF expectations of five years of low economic and employment growth and the case for believing demand is going to be strong enough to warrant big levels of new builds is not particularly compelling.

At a national level, the market for office construction is expected to flatten out after a short-term growth spurt this year; at a state level, flat activity levels are expected everywhere except for a short growth spurt in New South Wales and Queensland this year.

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