CBD office demand outlook gets a further boost led by Sydney, Melbourne
Simon Hunt, Colliers International Managing Director of Office Leasing, said both CBD and metropolitan markets across Sydney and Melbourne have received a significant boost to demand over the past six years thanks to record levels of jobs growth.
Since June 2013, Australia has added almost 1.4 million jobs. Over the previous six years (2008 to 2013), Australia added 1.04 million jobs, representing a 33% increase in the rate of jobs growth.
“Whilst the Australian economy has not been growing by an exceptional pace on a GDP measure, employment growth has outperformed historic levels and has been the main contributor to strong office demand conditions,” Mr Hunt said. “Importantly, recent announcements by the RBA suggest that this trend is set to continue.”
Rising employment has been given a boost due to a number of factors, including the reduced marginal cost of labor thanks to low wages growth.
“This means that the relative affordability of hiring additional staff has improved for firms over the past few years,” Mr Hunt said. “Coupled with this trend has been strong population growth, and a rising participation rate.
“The participation rate is currently 66%, which is the highest level Australia has ever seen, and means there are more working age persons currently employed or seeking employment in Australia now than ever before.”
Anneke Thompson, Colliers International National Director of Research, said a key indicator to watch when understanding Australian office markets was movement in the total volume of employed persons, as well as the type and spread of jobs available.
“This is a more important indicator than the unemployment rate itself, which can rise even when the total volume of employed persons is rising,” she said. “According to the ABS’ latest Labour Force data (June 2019), there are 248,900 more persons employed full-time and 79,900 more persons employed part-time than this time a year ago.
“Given that ABS data also tells us that 60% of all jobs available are in the white collar, health or education sectors, and 63% of all jobs available are in NSW or Victoria, it is clear that the distribution of jobs growth has been a major contributor to office demand in Sydney and Melbourne.”
“Looking forward, we have been given a strong hint by the RBA that the trends in rising volumes of jobs growth is likely to continue – even accelerate. At its June 2019 meeting, the RBA explained that most estimates of ‘full employment’, including the RBA’s own, was an unemployment rate of around 5%.
“Governor Philip Lowe also said that ‘given the combination of the labor market and inflation outcomes’ that an unemployment rate of ‘four point something’ can be sustained without risking inflation rising faster than 3%.
“This is a very important statement for Australian office market participants. What it means is that the RBA is likely to use the levers at its disposal to continue the high jobs growth environment that we have been experiencing over the past six years.
“A rough forecast suggests that if the RBA were to achieve its aim of a full employment rate of say, 4.5%, by 2025, this would mean that the economy would be adding circa 225,000 jobs per year, based on current participation and population growth rates.
“Given the trend has been for the majority of these jobs to be in areas that typically require office accommodation, this statement alone is an extremely positive boost to the demand outlook for the Australian office market.”
Simon Crouch, Colliers International Head of Tenant Advisory, said office markets within Sydney and Melbourne would remain tight over the next six to 12 months.
“This will limit choices for occupiers and tenants and emphasises the importance of well thought out strategies for occupiers well in advance of lease expiries,” Mr Crouch said. “We are, however, starting to see sublease space increase as companies seek operational efficiencies and cost reductions on the back of significant rental increases over the last two years.
“It is also important to note there are currently several office developments underway in Sydney and Melbourne with completion expected from 2021 onwards. This will lead to large back fill opportunities as tenants relocate into new developments, bringing some relief to tenants within these locations with vacancy expected to increase.
“Flexible space operators continue to play a major role in tightening vacancy rates within major CBD office markets across Australia. We have seen this in Sydney and Melbourne over the last year and this is now filtering out to other major markets too.
“For example, Brisbane has reached its lowest vacancy in five years, with flexible operators directly contributing to the take up in space. Given the significant amount of small businesses in Queensland, the Brisbane office market is an appealing location for flexible space operators and, like in recent months, we are expecting to see large flexible space operators looking to expand their footprint in Brisbane over the next year.
“Flexible space activity within Perth CBD is also expected to continue, providing alternate and flexible office accommodation options for tenants; like IWG’s new 3,000sqm Spaces centre which just opened in Perth CBD.”