Perth and Brisbane office vacancy rates forecast to double over next three years as mining boom demand fades: Morgan Stanley

Black clouds are gathering over the Perth and Brisbane CBD office markets with Morgan Stanley warning of a doubling of vacancy rates over the next three years as demand for office space from tenants tied to the mining investment boom wanes.

Based on the assumption of a 40% decline in engineering and construction investment tied to resources and gas projects, Morgan Stanley research analysts Lou Pirenc, Todd McFarlane and John Meredith forecast the Perth vacancy rate to increase from a current 6.5% to 17.5% by 2016.

Under the same conditions the Brisbane CBD office vacancy rate is set to rise from 12.9% to 22.7% by 2016.

There could also be significant rises in vacancy rates in the Sydney and Melbourne CBDs, which also have a large proportions of their white collar work force tied to the mining investment boom.

But not to the same extent as in Perth and Brisbane.

Morgan Stanley forecasts the Sydney CBD office vacancy rate to rise from 9.5% to 15.1% and Melbourne’s CBD office vacancy from 8.6% to 14.4%.

These forecasts factor in the impact of other industries growing to offset some of the slowdown in the resources investment sector.

According to Morgan Stanley, the peak in mining-related investment may have been in 2012.

The gloomy forecasts are based on assumptions around the impact of the mining boom in Perth and Brisbane, which have been a “robust source of white collar employment growth over the past decade”.

“We believe the associated unwind in investment in the coming years will adversely affect CBD office demand particularly in the resource-exposed CBDs of Perth and Brisbane,” say the Morgan Stanley analysts.

They estimate that more than a quarter (27%) of Perth CBD workers and a fifth (18%) of Brisbane CBD workers are directly or indirectly employed from the resource investment cycle.

“Ceteris paribus (all things being equal), if we assume a 40% decline in engineering and construction related investment tied to resources and oil & gas in the next three years (a realistic scenario according to our developers & contractors research team), it suggests Perth’s office vacancy moves from 6.5% to 17.5% and Brisbane’s office vacancy nearly doubles to nearly 23%.

“On the basis of our analysis, we have downgraded our office rent forecasts by 5% to 13% in resource-exposed CBD’s and fine-tuned other markets,” they say.

The expectations factor in the proportion of people in mining sectors that directly rely on mining investment.

For example of the 74,019 people employed nationally in ‘Exploration and Mining Support Services’, 97% directly rely on mining investment.

The figure is 36% for the 28,223 people working in iron ore mining.

In the construction services sector, 13% of the 664,198 people employed (86,000) directly rely on mining investment as do 9.5% of the 688,117 who work in Professional, Scientific and Technical Services, around 65,000 people.

“From the impacted industries, we have analysed the current employment levels in each state that relate to each of these sectors.

“Whilst in an absolute sense, NSW and Victoria have a higher number of employees in these industries, they represent a much smaller proportion of the total workforce (15% and 17% respectively) compared to Queensland and WA (18% and 27% respectively).

“We then estimate what percentage of each of these industries’ employment base is within the CBD.”

“By applying the reduced resources investment scenarios and applying this to each impacted industry, and reducing its CBD employment base, we then make a basic assumption of how this will flow through to reduced floor space demand in each  CBD office market, and what that means for vacancy compared to current vacancy levels.”