The commercial and engineering sectors have emerged as key areas of growth in a mixed outlook for the construction industry in Victoria, which is seeing housing starts drop back after a period of strong residential building activity.

Following a 5.1 percent drop last year, the Australian Construction Industry Forum (ACIF) expects the overall dollar value of construction work done throughout the state to grow by a respectable 4.2 per cent this year and to increase steadily from $34.537 billion to almost $40 billion ($39.447 billion) by 2016/17 as a strengthening commercial sector picks up some of the slack from a fall back in home building.

A sign of increased confidence in the commercial sector can be seen from the most recent Property Council of Australia Property Industry Confidence Survey, in which Victorian participants were far more confident about forward their own forward work schedule than they were 12 months ago and were more optimistic about near-term staffing levels than their peers in any other state except for New South Wales and Western Australia.

Below is a snapshot of current market conditions throughout the state in residential building, commercial property, non-residential building, engineering construction and construction industry employment:

Victoria Construction Activity

Residential Construction

Notwithstanding the low interest rate environment, activity in new residential construction throughout Victoria is expected to drop back to levels seen before the GFC following several years of abnormally high building activity. Though there is significant variation between sectors as levels of multi-residential building remain high compared to the levels seen over the last decade while stand-alone housing starts are expected to drop back to decade lows. In 2013/14, the Housing Industry Association (HIA) expects the overall number of dwelling unit commencements to drop plummet 18 per cent to 40,630 before stabilising.

On the brighter side, however, while the value of investment in home renovations throughout 2012/13 was not far off 10-year highs, the HIA expects activity to ease back but remain at high levels of $6.823 billion in 2013/14 and $6.932 billion in 2014/15 as resurgent house prices boost household capacity to leverage off the equity in their home to finance remodeling projects.

Victoria Housing Starts

Commercial Property

Expectations across most of the commercial property sector in Victoria have picked up in recent months but remain relatively subdued, with participants in the Property Council survey expecting zero to negative capital growth in all sectors over the next 12 months except industrial and retirement living.

Office vacancy rates in the Melbourne CBD jumped from seven per cent in January to 9.8 per cent in July according to the Property Council’s most recent Office Market Report, with demand at the premium end holding up reasonably well and extremely tight markets remaining at Docklands and the city’s northeast. Indeed, the vacancy rise was almost solely caused by a spike in supply as a whopping 167,621 square metres hit the market during the aforementioned period.

By contrast, the Property Council expects only 27,450 square metres to hit the market during the second half of the year (of which 52.1 per cent in pre-committed) followed by 92,629 square metres in 2014 (63.7 per cent pre-committed).

Commercial Property Price Growth Expectations

Commercial Building

Having dropped by around 18 per cent since its pre-GFC high, the annual value of work done in non-residential building has now bottomed out and is expected to grow from an estimated $8.487 billion in 2012/13 to $9.041 billion by 2014/15, according to ACIF forecasts.

Offices and entertainment and recreation are the best areas of opportunity, while key upcoming projects as per an ACIF listing include the Pegasus Project and a new Waterford community at Toolern Vale, Docklands New Quay Central, the Bendigo Hospital Redevelopment, a redevelopment of Chadstone Shopping Centre and stage 1 of the redevelopment of the Terminal 4 building at Melbourne Airport.

Engineering Construction

Having already maintained reasonably high levels of activity over recent years as an almost doubling in work on pipelines and electricity and mining and heavy industry compensated for weaker output in water and sewerage following completion of the Victoria Desalination Plant, the ACIF expects the value of work done in civil construction throughout the state to grow by a further 6.9 per cent in 2013/14. In dollar terms, that equates to $11.367 billion, a number expected to reach $11.84 billion in 2014/15 as work on the NBN keeps the telecommunications sector reasonably strong and work on a decent range of smaller projects such as the Dingley Bypass, the Koo Wee Rup Bypass and section 4c of the Geelong Ring Road drive higher levels of output in road construction.

Engineering Construction


Amid subdued levels of activity, current market conditions in the construction industry labour market in Victoria remain relatively soft. At 241,300 (ABS estimates), the number of people employed either full-time or part-time throughout the industry in the three months to May was up slightly from the previous corresponding period last year (235,700) but well down on the same figure in 2011 and 2010 (259,100 million and 257,300 respectively). Furthermore, in the residential sector at least, the most recent HIA Trades Report shows a moderate oversupply of tradespeople throughout Melbourne and a significant oversupply in Regional Victoria.

Going forward, expectations are mixed as weaker residential conditions make work harder to find in housing construction but a stronger commercial sector leads to more opportunities in that sector. Highlighting this, participants in the Property Council survey (heavily exposed to commercial activity) are more confident about 12-month staffing level prospects in Victoria than any other state except for New South Wales and Western Australia. Despite this, the ACIF expects average employment levels throughout the industry to average a rather low 243,000 in 2013/14.

Longer term, however, the ACIF is much more optimistic, expecting employment numbers to reach 265,000 by 2015/16.

Victoria Employment