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Upturn taking place in Australian office building despite high vacancy
Entrenched high vacancy rates will push new investment low through the second half of this decade
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Office building has been somewhat volatile in recent years, fluctuating with the timing of projects. Work done has been trending down in recent years, following the a peak in 2019/20. However, we are now forecasting a substantially higher level of work done over the next two years, as we are seeing a sharp rise in commencements and approvals. We estimate that the value of work commenced increased by 44% (in real terms) during 2022/23.
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We expect work done to peak at $9.8 billion (in 2020/21 prices) in calendar 2024, and then remain at close to that level for another year. This is up from less than $8 billion in calendar 2022.
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Vacancy rates are high across the country, and we forecast this to worsen due to the combination of reduced demand (in turn, due to an expected economic slowdown) and significant new supply of space as projects are completed. This will send vacancy even higher and reduce expected returns for investors on additional projects.
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Projects have already begun that will further add to supply and exacerbate already high vacancy rates. We expect office demand to be weak in the near term due to low economic growth and acceptance of work-from-home policies. There will be little incentive for new investment and, accordingly, we expect a downturn in commencements starting in 2023/24, and in work done starting in 2024/25..
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Ultimately there will be another upturn in three to four years as we emerge from the economic slowdown and space is absorbed. The chart above shows our expectation that vacancy rates will start to drop around 2026, which should incentivise the next upturn in investment.
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Non-residential building activity is at the tail-end of the strong upturn of the past few years, with commencements now on the precipice of a downturn. However, a backlog of work has created a disconnect between commencements and work done. While we expect commencements to decline in 2023/24, we forecast growth in work done to continue, buoyed by the backlog work that has accumulated.
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Subscribers to our Australian Construction Outlook reports are now able to access dashboards, as seen below -
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Our most recent reports:
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Australian Construction Cost Trends
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This report examines the outlook for construction costs, in detail be sector and type of input.
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Australian Construction Projects Database
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This latest list of projects corresponds with our fully revised set of forecasts published in November 2023.
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Australian Regional Construction Outlook
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Our latest regional forecasts for residential building and construction have just been released.
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Australian Construction Materials Forecasts
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Our latest forecasts assess the implications for construction materials demand of the current outlook for building and construction.
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Australian Road and Bridge Works
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This report examines the strength and composition of the current upturn, and determines the likely timing of the peak, and subsequent decline.
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