White Collars Wilt In The City
Sydney Morning Herald
Saturday June 7, 2008
A CHINK in the armour of CBD office markets has appeared. It's not deep enough to cause concern but landlords have moved the indicator to the top of their watching briefs.
The health of the office leasing market, and indeed white collar employment, can be estimated by the health of recruitment agencies. In 2004, the CBD was a hotbed of such bodies. Not long afterwards, office vacancy moved down to its current 3.7 per cent. But the recruiter Chandler Macleod recently issued an earnings downgrade, warning that earnings before interest, tax depreciation and amortisation for full year 2008 will be $18 million to $20 million, against previous guidance of $22.2 million to $23.2 million. The directors said many of the factors affecting earnings were one-off items and the outlook for next financial year was positive. But if headhunters start to see fewer clients, it will be taken as another sign that the economy is weakening. Citigroup analysts have projected that white collar employment cuts in the Sydney CBD will have a negative impact on occupancy and market rents. "However, given the subdued supply outlook until the 2010-11 financial year, real estate investment trusts are reasonably well placed to weather negative market rent growth from current peaks," Citigroup says. "We now forecast negative white-collar employment growth, of about 0.5 per cent, and negative net absorption over the next two years. [Reserve Bank] monetary policy tightening and the impact of the credit crunch should negatively impact white collar employment growth. Financial services jobs cuts could partly be offset by the Australian infrastructure boom helping design and engineering services jobs." Jenine Cranston, director of CB Richard Ellis's office services business, said Sydney CBD vacancy was at record lows and limited new supply should avert big rent declines. However, there was evidence that companies were being conservative in their office leasing requirements, she said. "We believe that June 30, the end of the financial year, will give tenants a good road map for the year ahead and what they will need for office accommodation," Ms Cranston said. "But there is a pause in the market at present as companies seem to be putting decisions on hold. "However, with vacancies at 3.7 per cent and continued demand for space on our books through to 2009-10, we are quietly upbeat." As Citigroup points out, white-collar employment growth is the main driver of demand for office space and significantly influences vacancy rates and market rents. Recent strength in Sydney and Melbourne has resulted from several years of strong white-collar employment growth. "However, with an impending economic slowdown, we expect a reduction in white-collar employment growth to impede further growth in office demand and thus market rents," Citigroup says. "Reserve Bank efforts to contain inflation will likely increase unemployment. Unlike the previous downward employment cycle, when blue-collar employment fell significantly, we expect the downturn to be focused in the white-collar sectors, particularly in the financial services sector." But the financial conglomerate does not expect white-collar employment to fall dramatically for a sustained period, as it did in the last downturn, when it was weak from 1990 and negative in 1993. "Given the current mining and pending infrastructure booms, employment growth in white-collar jobs such as engineering services is likely to continue to be robust, and reduce any negative impact," Citigroup says. "However, the Sydney office market is highly exposed to the financial services sector and will face low demand and lower market rents if financial services job cuts occur as expected. We expect weak office demand to reduce rents. However, the big saviour is the limited new supply coming into the market." There are few office developments under way in the Sydney CBD and most major new supply projects are expected to be competed after 2010.
© 2008 Sydney Morning Herald
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