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    Underlying demand for office space low but expected to improve

    BIS Shrapnel

    BIS Shrapnel reports that the latest underlying demand indicator for office markets remains weak.

    Underlying demand is usually a lead indicator of net absorption, explained as the change in occupied floorspace. It is the amount of net absorption required to meet the change in employment in purpose-built office buildings with no change in the workspace ratio.

    At a national level, annual underlying demand has fallen from some 320,000 square metres as at November 2013 to 190,000 square metres at February 2014. However, this is a considerable improvement on the negative underlying demand recorded in mid-2013.

    Maria Lee, Senior Project Manager at BIS Shrapnel observes there is likely to be a lag before the recent improvement in underlying demand is apparent in net absorption.

    BIS Shrapnel traces the subdued state of underlying demand largely to the business services sector, where employment fell last year, which according to Lee is an unusual situation since for most of the last 30 years, the services sectors have seen stronger growth than the rest of the economy. Staff cuts have resulted in productivity improvements that are unsustainable.

    BIS Shrapnel anticipates that when investment in the non-mining sectors recovers, it will broaden industry growth, boost services, underwrite a recovery in office employment and drive stronger demand for office space. Lee cautions it will be another year at least, probably longer, before non-mining business investment comes through; however, the worst is over and net absorption is expected to return to positive territory in the second half of 2014.

    The demand for office space will slowly recover, building momentum through the second half of the decade. The outcome for any particular city will depend on its mix of business. So mining investment-driven cities will be weaker while the services and trade-exposed cities will do well. In particular, Melbourne and Sydney will benefit from the recovery in business investment and structural change.

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