Home > Demand for office space remains subdued but will improve, BIS Shrapnel says

Demand for office space remains subdued but will improve, BIS Shrapnel says

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A new report by BIS Shrapnel indicates that underlying demand in the office markets sector remains weak.

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

Underlying demand is a driver of net absorption and indicates 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.

Maria Lee, Senior Project Manager at BIS Shrapnel explains there is likely to be a lag before the recent improvement in underlying demand is apparent in net absorption. She added that national net absorption remained in negative territory at December 2013, although underlying demand had by then rebounded.

BIS Shrapnel traces the subdued state of underlying demand largely to the business services sector, where employment fell last year. Lee believes it is unusual because for most of the last 30 years, stronger growth has been seen in the services sectors 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 this might take 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 recover, slowly at first, building momentum through the second half of the decade. The outcome for any particular city will depend on its mix of business. While mining investment-driven cities will be weaker, 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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