Commercial building operational costs rise at twice the inflation rate: Turner & Townsend

Operational costs for commercial buildings have increased by double the rate of inflation and four times the rate of construction cost rises during during the last 10 years, according to the latest figures from Turner & Townsend. 

The company compared increases in the cost of rates, electricity, insurance, maintenance wages, cleaning and security. These were then compared with cost movements for the CPI (consumer price index) and the cost of non-residential construction from the Australian Bureau of Statistics data.

Gary Emmett, senior economist for Turner & Townsend, said while the overall operational expense items have increased by 58 percent during the last decade, CPI inflation rose 28 percent and the cost of non-residential construction was up 16 percent over the same time period. 

The analysis covered Sydney, Melbourne, Brisbane, Perth and Adelaide. 

“Primary factors driving cost increases are rates, electricity and insurance. Wages and cleaning costs have increased at inflation or just above, while security increased at less than inflation,” said Emmett.

“What we discovered is these items tended to increase significantly in some years, however drop off in others. Electricity costs are prone to spikes and troughs, increasing by 18 percent in 2012 and then falling by two percent in 2015 - 2016. 

“Of all the items included, electricity was the most volatile with severe increases experienced in each region during the last decade, but not simultaneously. In both 2010 and 2012, electricity spikes were particularly high across all five regions. The last six months has demonstrated electricity costs throughout Australia are escalating.”

He said rates have always risen more than the CPI in all regions over the past decade. In both 2008 and 2009, these were particularly high in all regions with average rate rises above six percent. 

For Melbourne and Adelaide, rate increases in 2013 and 2014 were about 16 percent.

“As a result of the national electricity market changes, including a transition to renewable energies, there is a high probability suppliers will continue to increase charges in the short term while new technologies and distribution systems are implemented,” said Emmett.

Higher Council rates reflect a need to increase revenue. Average rate increases of around four percent are currently below the 10-year average of 5.7 percent. 

“Weaker public sector wages growth and CPI growth rates may hold rate increases at similar levels within the next few years.”

“Insurance premiums are up 60 percent nationally within the last ten years, more than twice the increase in CPI. Climate change, higher fire and flood risks are likely to increase insurance premiums,” Gary added.

The commercial building sector is set for solid growth during 2017-18 based on the number of new commercial buildings commencing in the coming year. Office construction is predicted to increase in all of the east coast capitals. 

Sydney is likely to lead with its strong service economy driven by finance, real estate and insurance. However, Melbourne and Brisbane are also looking to experience a surge with several new projects poised to start.

“Businesses need to be mindful of the additional costs of building ownership as costs typically spiral upwards. The trend towards higher cost increases across major commercial building expenses is evident over the past decade. Businesses are unlikely to impact on council rate increases apart from lobbying, which is more often than not unsuccessful.

“With electricity so volatile, there is a greater requirement for more sustainable designs. Building owner operators or building tenants should identify sustainable energy saving technologies to reduce power usage, and insist any new buildings install these technologies.”

An analysis reflected that the operating cost increases across the states were fairly evenly spread, though Brisbane was marginally higher. Electricity costs have risen by 144 percent in Brisbane within the past ten years, compared to 114 percent nationally.

“When considering where to locate, landlords and tenants are increasingly evaluating whole of life costs rather than up-front costs,” Gary concluded.