Office occupier demand in Australia has been anaemic over the past 18 months, but 2013 is believed to have been the market trough. While current data suggests that Australia is the laggard market in the Asia Pacific region, demand is nevertheless expected to improve from the second half of 2014. This modest recovery will be underpinned by a number of key office occupier groups.
So, a key question that needs answering is: “which sectors are likely to drive office demand over the next three years?”
Figure 1 shows the breakdown of the four largest industries (by employment) that operate in offices in Australian CBD markets, accounting for around 60% of the total CBD workforce*. Employment data is a reliable proxy for measuring office demand, with a strong correlation between white collar employment and office net absorption. Clearly, the performance of these four sectors and, consequently, how many people they employ, will have a significant impact on the level of occupied office stock in Australian CBDs.
The industry that is forecast to show the strongest employment growth in the next three years is already currently the largest. The ‘Professional, Scientific and Technical Services’ sector already accounts for 21% of total CBD employment (Deloitte Access Economics). This is expected to grow further, with the workforce rising by 10.4% by 2016. Employment growth in this sector will account for half of total new workers in CBDs over the period, driven by the transition of the economy’s growth drivers from mining to business investment.
The ‘Public Administration and Safety’ sector is expected to account for the second largest increase in workers in Australian CBD offices, with the workforce expected to rise by 3.2%. To a large extent, population size dictates the level of public sector employment. An adequately sized public sector workforce is required to properly service/meet the needs of the tax-paying and non-tax-paying population. So, even with the provision of cuts to the public service headcount in the recent Federal budget, total employment in the public sector is still expected to rise.
The ‘Financial and Insurance Services’ and ‘Information Media and Telecommunications’ sectors both have only moderate growth prospects over the next three years. Both industries were heavily impacted by the Global Financial Crisis (GFC) in 2008, and the size of their workforces is still well below their pre-GFC peak. Nonetheless, employment levels have largely stabilised and financial and IT business activity is building. As a result, we expect that firms within these two industries will switch from the office rationalisation strategies employed in recent years to modest office expansion policies.
Currently, occupied CBD stock is well below the mid-2012 peak of 15.0 million sqm. Current forecasts indicate that a new peak will not be achieved until late 2015 or early 2016. Understanding the performance and employment dynamics of the four sectors listed above during this period will allow landlords, occupiers, and asset managers to better to identify opportunities and mitigate risks in the Australian CBD office market.
*Note that employment in CBDs also includes non-office workers. The selected industries analysed in this blog are considered the primary occupants of office accommodation in Australian CBDs.
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