What could demand look like over the next five years?

Understanding supply and demand fundamentals in our key office markets is crucial to understanding growth in income potential, as well as relative value of office assets into the future. In the short term, we can look at new supply, pre-commitment deals, treatment of backfill space and withdrawal activity to help inform the supply, demand and vacancy outlook. However, over the longer term, this is much harder, as much of this activity remains unknown. This article explains the key pieces of data we consider when forming our view of supply and demand in a post 2024 world.

Changes in employment trends

The number one leading indicator is the growth in employment, and more specifically, white collar employment. However, growth in jobs in and of itself doesn’t tell the full picture, and we need to look at the changing trends in jobs, and how they occupy office space. 

The key driver of employment in Australia currently are in government, health, education and government-related services (i.e. professional services such as accountants, consultants, IT). Where jobs are declining are in the retail trade and manufacturing sectors, which have far less of an impact on the office sector. One question to ask when thinking about long term demand, is do we expect these trends to continue? On balance, it is likely that they will. The RBA has recently revised its determination of ‘full employment’ from 5 per cent, down to 4.5 per cent. Currently, seasonally adjusted unemployment is 5.2 per cent. For the RBA to succeed in its mandate of maintaining full employment in Australia (it’s other mandate is to maintain inflation within a band of 2 and 3 per cent), then Australia will need to add around 225,000 jobs a year to keep pace with expected population growth and full employment targets.

Trends in jobs have shown that job vacancies over the past five years – in fact since the rise in employment growth began – have been overwhelmingly in favour of white collar jobs. In fact, 44 per cent of all jobs growth now are white collar jobs, up from 40 per cent in 2014. This means that on the most positive estimations, being if the RBA succeeds in getting Australia to full employment, circa 100,000 white collar jobs would be created each year. This equates to about 1 million sqm of office demand Australia wide each year.

Employment growth

Will Australia reach full employment?

While on face value reaching an unemployment rate of 4.5 per cent seems like a lofty goal, consider that Australia’s unemployment rate globally is high compared to other G20 nations. Australia sits about middle of the pack in terms of unemployment, with the US, UK, China & Germany all having sub 4 per cent unemployment rates. ‘Lower for longer’ bond yields have kept economic stimulus high in countries around the world, not just Australia. Given that this phenomenon is expected to continue, with two further cash rate cuts likely, it is not too high a growth scenario to consider strong employment conditions will continue.

Unemployment rates of G20 countries

Unemployment rate

Note: Rates are latest available in each country
Employment growth chart