Five key sectors are driving demand in today’s office markets
Article322 October 2019
Over the past few months I've had many conversations with investors and other stakeholders on the continued health of office markets, in particular, the areas that are driving demand. In a world of Brexit, trade wars and slowing global growth, demand for office space should have evaporated. Inevitably demand will ease – we have been in this cycle for four years now – but what is surprising is the continued strength in leasing markets. New sectors have emerged to fuel office space demand and already established ones are expanding.
Financial services sector
There are five key areas which are currently driving the take-up, with the financial services sector at the top of the list as its footprint grows in the wake of the Banking Royal Commission and financial services inquiries. The risk and compliance functions in these groups are especially driving the demand as significant resources and people are channelled into complying with, or advising on, the regulatory environment. Additional office space is being absorbed as groups spin off divisions, expanding to meet increasing compliance requirements and upgrading the technology needed to meet them. We’ve seen major consultants taking additional space for IT projects associated with the increase in risk mitigation and control; a strong driver of take up in Sydney and Melbourne.
Health and Education sectors
The health sector has become the second demand driver growing solidly in Sydney, with the education sector the third demand driver and being particularly strong in Melbourne. Part of this scenario has been the refocus on CBD locations. Why? Because these groups are competing for the best talent in finance, marketing and IT, and these workers want to work in the CBD. In fact, this focus on CBD locations as a lever in the race to secure top talent has seen businesses across many sectors move back to city addresses.
Co-working, which is now a global norm, is the fourth demand driver. While only representing about 2.4 per cent of the Sydney and Melbourne markets, it accounted for 18 per cent of new take up over the past 12 months. The drive for flexibility by business in their workplaces is spurring the expansion of both traditional serviced office companies and underpinning the growth of newer entrants such as WeWork and our own Dexus Place. Meanwhile, co-working has grown the overall demand for space, drawing people into the city who once worked from home or from cafes.
And finally, the rise of the technology companies. Whether it’s Amazon, Google, Salesforce, Atlassian or others, these groups are growing rapidly, and so is their demand for space. Salesforce, for example, more than doubled its footprint in its recent Sydney lease. Overlaying this are the technology upgrades and new technologies being introduced everyday across businesses. Most of our circa 5,000 customers are working on an IT project right now, and of the 650 people who work at Dexus, around 50 are working on technology projects.
"These trends and demand drivers are global."
London’s office market should be faltering as the Brexit chaos rolls on, instead its vacancy rate is only 5.5 per cent on the back of resilient demand.
And in Australia, white collar employment has been strong, growing 2.8 per cent annually for the past five years, with much of that happening in the CBDs.
Australia’s office markets have also been supported by the lack of oversupply. In the past, at this point in the market cycle you would expect to see more buildings being developed without tenant pre-commitment, but in today’s environment such projects are unlikely to secure funding, in turn, lessening the threat of too much supply.
The supply/demand dynamic in the Sydney CBD looks very attractive with office vacancies forecast to be circa 7 per cent - less than the long-term average of almost 8 per cent - even as more supply comes online in 2023-24.
Looking at past market cycles is the traditional way to predict how the future will play out. But global trends and drivers in the office markets are changing and accelerating, and chances are that markets will not follow the patterns of previous cycles.
But even as this cycle further matures and the market inevitably does ease, the combination of the new drivers of demand, limited future supply, along with the trend of urbanisation and refocus on CBDs will result in sustained strong returns for the office sector.