Our Chart of the Week shows the significant turnaround in demand momentum in the resource markets of Brisbane and Perth. The risks that we highlighted in Trust Talk #241: Mining Capex Slowdown – The ‘Canary in the Coalmine’ for Office Demand are materializing with record levels of negative demand in Brisbane and Perth reported during 2013.
The unwind in investment in the coming years will see this trend continue. Our previous sensitivity shows that a 40% decline in engineering and construction related investment tied to resources and oil & gas in the next 3 years (a realistic scenario according to our D&C colleagues), coupled with current know supply, could see Perth’s office vacancy move to 17.5% and Brisbane’s to ~23%.
More Mature CBD Markets Holding Up Better. Although National demand posted its largest 12 month falls since 1992, it could have fallen further had the Sydney and Melbourne CBDs not held up as well as they did. Whilst demand remains negative in these more mature markets, demand is now less negative than it was 6 months ago and appears to be stabilizing.
But Sydney Appears to be Stabilizing
Could Demand Momentum Turn Positive? Although we don’t expect an instantaneous return to positive demand momentum in the near term, we acknowledge that downside risks continue to moderate.
Indeed, several lead indicators suggest that demand in the Sydney and Melbourne CBDs could surprise on the upside, particularly when considered against today’s depressed levels (demand in the Sydney CBD has averaged 1.7% p.a. over the past 20 years vs -0.5% p.a. since 2008).
Improvement in US Could Provide Support
MS Strategy’s calls for an East Coast Recovery could see demand surprise on the upside over the medium term. Our Macro Team recently highlighted the potential for an East Coast recovery in their 2014 Outlook with an improving housing cycle and credit growth flagged as two key themes to watch.
There’s probably no need to repeat my doubts about the potential for an east coast office rebound.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
