Six reasons why demand for office space will improve

After a year in which the number of empty floors in Australia’s office buildings increased to around one in 10, there is an intense debate about where office demand will come from. In the context of a generally subdued economic outlook, there are at least six reasons why office demand should improve over the next year or two:

1. Business confidence is improving

Business confidence has trended up over the past six months in all states and across most industries and is now close to a three year high.Confidence is a key component of the DEXUS office barometer which predicts improvingconditions for office demand in the Sydney CBD.

2. Improving corporate earnings outlook

The share market has strengthened considerably over the past year. A stronger share market is expected to lift confidence further and lead to more corporate transaction activity, supporting demand for space in the investment banking, legal and accounting sectors.

3. The Australian economy is responding to low interest rates

While declining resource investment will be a drag on economic growth, other factors will partially offset it. Improving retail sales, tourism numbers and housing construction will all contribute to growth. Meanwhile the trading bank sector is benefiting from improving credit growth, and the health and education sectors are also on a growth path.

4. The business service sector will benefit from outsourcing 

The business services sector in Australia has added more jobs to the economy in the past decade than the government and mining sectors combined. While state and federal governments are intent on consolidating to the detriment of demand for office space, such consolidation usually leads to outsourcing,supporting growth in the business services and technology sectors.

5. Most firms will grow, despite productivity gains 

Over the past decade the number of firms expanding at the end of their office lease has outstripped the number of those contracting, by a factor of three to one. While the corporate sector in Australia remains focused on productivity improvement, this focus should slowly shift towards expansion as corporate earnings benefit from productivity improvements and low financing costs.

6. Tenants will migrate to quality buildings

Competitive rents in the major CBDs areencouraging the inward migration of tenants from fringe and suburban locations - estimated at more than 20% of recent CBD leasing. In addition, tenants are actively migrating from poorquality buildings to better quality stock, leading to withdrawals of older stock.