As federal and state governments scramble to bring fiscal balances under control, the impact of savage public sector job cuts is flowing through to the commercial property market in Australia.

Releasing its latest quarterly indicator, BIS Shrapnel says underlying demand for office space – the amount of net absorption that would result from the change in employment in purpose-built office buildings assuming no change in the workspace ratio – came in at just 125,000 square metres around the nation, well down on the 250,000 plus square metres earlier in the year and way below the 10-year averages of 660,000 square metres.

Leading the decline was a fall in demand from public sector tenants, with BIS noting that a ‘a much-anticipated decline in ‘public administration and safety’ employment appears to be coming through. BIS says this is consistent with the policies of cost-cutting announced by federal and state governments.

In other sectors, BIS observed that employment in ‘property and business services’ had recovered whilst finance sector job levels remained stable.

Around Australia, employment levels across most of the public sector are set to drop back following savage budget cuts at federal and state levels – a phenomenon which all other things being equal is expected to lead to reductions in the need for space among public sector clients.  .

Worst hit will be smaller capitals where the public sector represents a large component of overall demand.

Canberra, which will bear a large part of the brunt associated with the 16,500 positions expected to be cut at the federal level, will be particularly impacted.

Not surprisingly, participants in the Property Council of Australia’s most recent Property Industry Confidence Survey were more pessimistic about prospects for the ACT market than for any other state/territory in the country.

Likewise, Hobart will be affected by Tasmanian government moves to reduce public sector headcount by around 1,200 in that state.

office space chart

Despite the overall drop in underlying demand, however, BIS senior project manager Maria Lee expects net absorption to improve in the near term, and that underlying demand would in any rate recover again in the not too distant future.

“Underlying demand is usually a lead indicator of net absorption (the change in occupied floor space from one period to the next),” she said. “We haven’t yet seen the improvement in underlying demand after the slump in 2013 fully feed through to net absorption. As such, we should see net absorption move back into positive territory by the end of 2014.”

BIS also reiterated its earlier stated expectation that the recovery in demand for office space will gather momentum toward the latter part of the decade.