What Australia’s changing economic drivers mean for office demand

April 15, 2013 / By  

Australia’s office markets unequivocally softened in Q1/2013. Negative net absorption of 90,700 sqm was recorded across the six major capital city markets and vacancy across these markets rose from 8.8% to 9.9% in the quarter. For investors this raises the question of whether the Australian economy is now finally experiencing the global economic weakness that it has largely been insulated from by the resources boom, or is this just a temporary soft-spot as economic drivers switch from external to domestic drivers?

There can be no question that Australia’s growth drivers are in transition. The chart below shows that private construction investment made very large contributions to Australian GDP growth in 2011 and 2012, which largely reflects unprecedented levels of resource sector investment. In 2011 (and also earlier) this impact on growth was somewhat offset by a surge in imports of large capital goods for these projects. Consumer imports were also boosted by a strong Australian dollar, but this impact faded in 2012 and net exports (exports less imports) were no longer a drag on GDP growth.

The investment phase of Australia’s resource boom now appears over and the sector is now in a cost containment mode. Private construction investment is expected to remain at a high level over the next two years, but not contribute as much to GDP growth. Eventually, mining investment will start to fall more significantly and is forecast to subtract from GDP growth in 2015. This fall will be offset by higher exports as resource project complete, but also by more solid contributions to growth over the next few years from parts of the economy that have been weaker over recent years, such as retail spending, housing investment and general business investment in equipment and machinery.

So is this transition of economic drivers on track? All recent indicators suggest that it is. Consumer sentiment has been relatively strong for the past five months and this has flowed through to stronger retail turnover growth in early 2013. Leading indicators of the housing market have also improved, which are backed up by our own liaison with residential developers that suggests sales rates have picked up in 2013. It appears Australian consumers are finally feeling confident enough to capitalise on lower interest rates and not delay major consumption and housing investment decisions any longer.

For the office market, it will take some time for this embryonic domestic recovery to flow through. Businesses will want to see a sustained improvement in consumer spending before they have the confidence to expand and hire. In the short-term, the market is still suffering from the slowdown in demand from the resource sector and from public sector contraction in many states. Nevertheless, the seeds are being sown for a broader recovery in business confidence and spending and the bottom of this office demand cycle should already be fast approaching.

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