At just $1.308 billion, the value of work done in office construction during the September quarter was down 20.73% when compared to the corresponding figure in September 2009, and was a whopping 42.63% lower than the value of work done in the December quarter of 2008, according to figures from the Australian Bureau of Statistics (see chart).
Worse, media reports suggest that the sector slumped by a further 9.9% in the December quarter. (ABS results for the December quarter will be made public in April.)
Is the tide turning?
The immediate outlook for this sector does not look bright. Buoyed by the signing off on a $197 million commercial and residential development in Ryde, NSW, private sector office building approvals spiked to $525 million in December, reaching their highest level since May. But in January, approvals plummeted to $144.8 million – down 40% on January 2010 ($241.4 million) and far lower than levels seen at any time over the past twelve months. Even after allowing for seasonal factors, this figure is ugly.
However, the news is not all bad. Office vacancy rates, another important forward indicator of likely activity, fell nationally from 10% last July to 9.5% in January, according to figures released in January by the Property Council of Australia. That was first time that a decline has been registered for three years (refer chart).
At the time the data was released, Property Council CEO Peter Verwer said that Australia had moved “from a shrinking market” to one in which “demand is growing at twice the historic levels”.
Better yet, CBRE Global Research and Consulting Senior Manager Luke Nixon sees vacancies falling further this year.
Indeed, with the exception of Canberra (13.4%), vacancy rates in all capital cities are now below 10%. The rate for Hobart stands at just 4.6%. The major cities, Sydney Brisbane and Melbourne, are all showing signs of growing demand.
Melbourne is particularly strong. The vacancy rate in Melbourne now stands at 6.3%. That falls further to 5.3% when Docklands and Southbank are included, according to research firm Savilles Australia. (Savilles includes Docklands and Southbank as part of central Melbourne in its calculations. The Property Council figures, by contrast, do not include these areas.)
Savilles National Head of Research Tony Crabb, who puts Melbourne’s low vacancy rates down to stalled CBD construction as a result of risk aversion on the part of banks in the wake of the global financial crisis (GFC), is bullish about the outlook for activity.
”The upshot [of banks’ reluctance to lend during the GFC] will be zero vacancy, which will in turn put significant upward pressure on rents and drive a new round of construction and a flurry of new investment activity as investors seek to take advantage of rental upside and capital growth,” Mr. Crabb told the Sydney Morning Herald last month.
”We will also see a surge in activity in the suburban office market, especially in the inner-eastern suburbs and in the south-east growth corridor, as CBD tenants unable to find accommodation are forced to consider alternatives.”