Conditions continue to deteriorate in commercial building as a long hoped for improvement continues to elude the sector.
Activity in the sector fell yet again in May for the eleventh straight month, according to the most recent Performance of Construction Index report released by Australian Industry Group early this month. In May, the commercial sector registered construction activity of just 30.5 (any reading below 50 represents a decline in activity).
Worse, the value of new orders, which has been decline since last June, fell yet again in May, registering 39.8 on the index.
Forward looking data paints a mixed picture. On one hand, construction information service provider BCI Australia expects the value of construction starts in the sector to be up by 46% in the year to August. However, the overall value of approvals for the past twelve months ($4.254 billion) is much less than current levels of activity, meaning that new work is coming in at a slower rate than existing work is being completed.
Not surprisingly, then, the Construction Forecasting Council (CFC) expects the value of office building activity to contract in calendar 2011 from $5.089 billion to $4.940 billion.
Longer term, however, the fundamentals look promising. Over the next two years, office vacancy rates are expected to drop from 7.0% to 5.2%, according to NAB’s Quarterly Australian Commercial Property Survey: March 2011. In that time, gross rental returns are expected to rise from around one per cent today to almost five per cent, and capital values are expected to rise by 4.3%.
Not surprisingly then, long term expectations are positive. In 2011/12, BCI expects construction starts to grow by 23.2% from $3.832 in 2010/11 to $4.720 in 2011/12. By 2012/13, the CFC expects the value of work done to have reached $6.586 billion.
Large States lead the way
The larger states are expected to generate the lion’s share of the recovery. By 2012/13, the CFC expects the value of work in New South Wales/ACT to have reached $2.222 billion and that in Victoria to have reached $1.674 billion, up from $1.710 billion and $950.6 million respectively in calendar 2010.
New South Wales is expected work on the commercial component of the Barangaroo waterfront urban renewal project, as well as that on a small number of other projects in the $200-$300 million value range.
Victoria has some good projects coming through, including a mixed use development on 1.3 ha of land in central Footscray ($350 million), the NAB Docklands Campus 2 ($300 million), construction of a seventeen storey campus style office building at 171 Collins Street ($280 million), and a new ten storey tower behind Scots church in Collins Street ($150 million).
SA is the other promising state, with good projects coming through including a new seventeen storey office tower in city central, a new Harris Scarfe office and retail tower and the redevelopment of the Adelaide Convention Centre.