BIS Oxford Economics: Golden years for offices at an end

Sluggish employment growth and increasing supply in Sydney’s CBD is likely to have a dampening impact on the office market.

Sydney’s CBD offices have had a great run Picture: AAP

Sluggish employment growth and increasing supply in Sydney’s CBD is likely to have a dampening impact on the office market as the golden years come to an end, according to forecasting by BIS Oxford Economics.

The Sydney market has enjoyed strong growth in the office sector over the past three years.

In the three years to June, ­vacancy rates in the CBD managed to squeeze down to 3.7 per cent — the lowest rate in more than 10 years.

This result was underpinned by NSW’s strong economy, reflected in average annual growth of 3.3 per cent and an increase in office employment by almost 30,000 people.

Tighter vacancies translated to a noticeable uptick in prime net effective rents and capital values, up by more than 45 per cent between June 2016 and June this year.

But the uptick in employment growth rates did not translate into much take-up for office space.

Net absorption averaged less than 2000sq m of space a year as companies chose to accommodate increasing headcounts via more efficient use of space, which is reflected in lower average workspace ratios.

The tide appears to be turning, however, as market conditions in the nation’s largest office market turn and risks begin to emerge.

Last financial year, NSW’s gross state product increased a slight 1.5 per cent. BIS Oxford Economics expects this will remain weak over the next two ­financial years.

Weaker economic conditions are likely to affect office employment growth in the CBD, forecast to slow to a 1 per cent increase a year.

At the same time, six new buildings are slated for completion, adding more than 130,000sq m of new supply to the market.

While optimistic about the market outlook, Lee Walker, BIS Oxford Economics’ principal property economist and author of the latest Sydney office market forecast report, said the trajectory of the market had much to do with the impact of changing employment trends.

So, will slow office employment growth and rising supply derail the CBD market upswing in Sydney?

“The short answer is we don’t think so,” Mr Walker said.

“However, it does depend on whether the reduction in workspace ratios over the last three years were permanent or a reflection of pent-up demand for office space, caused by low ­vacancies.

“We think it is a bit of both,” he added.

The report predicts the release of pent-up market demand and high levels of precommitment to the stock set to enter the market in the two years to June 2021 will help keep vacancy levels below 5 per cent.

“That means the upswing in the Sydney CBD office market has further to go but we do not think it will last indefinitely,” Mr Walker said.