Why we need more ways to measure CBD health

Above: Brisbane in 1982 - then and now. 

The Property Council’s “Office Market Report” (OMR) has long served as a proxy for the market health of our CBDs. But the nature of CBDs has evolved and changed dramatically over time, and office markets alone are no longer the indicator of city centre economic vitality they once were. Here’s why it’s time to broaden the thinking. 

The collection of data for the Office Market Report dates back to the late 1970s or early 1980s, for what was then BOMA (the Building Owners and Managers Association) but which from 1996 became the Property Council of Australia. The OMR was central to BOMA’s industry interests then – given the focus early on was almost exclusively on the investment and management of CBD office buildings. The OMR provided a catalogue of CBD Office buildings, their lettable areas, quality grades, vacancies and future supply. This was essential for assessing the demand for space and tracking market changes. Excel macros are today vastly superior to the early pen and ink paper calculations, but the OMR methodology and metrics remain largely the same since then. 

In those days, CBDs were primarily for business (the ‘B’ in CBD) and that business was conducted almost exclusively in various office towers. People flooded into work in the mornings and vacated in the afternoons. After hours and on weekends, CBDs were ghost towns. The idea of going to the city for a weeknight restaurant meal was almost laughable. The idea of shopping or entertainment in the city was equally limited in appeal.

Consider Brisbane in 1980. There was no Queen Street Mall (its first stage opened in 1982). The Myer Centre didn’t open until 1988. There was an old McDonnel & East Department Store in George Street but that was about it for retailing. There were almost no restaurants, with a couple of notable exceptions (anyone remember Milanos?) mainly focused on the business lunch trade. They mostly did not open for dinner. The Sofitel Hotel (which opened as a Sheraton) above Central Station didn’t open until the late 1980s, as did the Hilton (opening 1987). Prior to this, we had Lennons (now Next Hotel) and the Crest (now Mercure) and that was about it. The city in this era was all about office buildings and the office workers in them. Studying demand for office space was a suitable proxy for the health of the CBD economy because there wasn’t much else to it.

Above: A lot has changed since the 1980s. Maybe our measures of CBD health need to change too? Pictured is a photo titled "At the pub, Brisbane 1982" by photographer Rennie Ellis. 

How things have changed. In addition to a raft of new office buildings which have doubled the CBD office space stock since then, there have been even more significant changes to the composition of what makes the CBD tick. The Queen Street Mall alone now counts 7 shopping centres and over 40,000 square metres of retail space. In addition, new retail precincts are springing up along spines of the CBD. There are multiple new and recent hotels, adding nearly 2,500 rooms in the 2014-16 period along, with nearly 3,000 more to 2020 and roughly the same again predicted beyond 2020. Brisbane’s CBD and inner city accommodation industry sells more room nights than the Gold Coast. There’s also been an explosion of restaurants, cafes, bistros and eateries, there have been new cinemas and entertainment venues and a raft of luxury apartments added to the CBD as well. 

By now, the CBD was only partly for office workers; it was also a hive of activity for travellers, shopping, dining and recreational pursuits. On weekends when most of the office buildings are empty, the city can still be alive with activity. 

Now think about the new projects currently proposed for the CBD – many of which will further add to the variety of economic activity taking place in the city centre. Office projects, while still important, do not dominate.  

The $3.6 billion Queens Wharf project alone will add 1,000 hotel rooms across five hotels, 2,000 new apartments, a Casino, and multiple retail and dining options. Brisbane Quarter has recently added the W Hotel and will soon add a new residential tower, an office tower and extensive retail space. AEG Ogden’s Brisbane Live is a $2 billion entertainment focused proposal for the Roma Street Railyards which includes redevelopment of the Brisbane Transit Centre. The Howard Smith Wharves redevelopment will add a new 165 room Art Series Hotel, a range of dining, retail and tourism related attractions, meeting rooms and extensive public domain space. And Dexus’ proposal for a redevelopment of the Waterfront Precinct proposes two new towers with a combined 175,000 square metres – where possible uses are hotel and residential along with office space – plus up to 10,000 square metres of new dining and retail space. 

The point is that increasingly our CBDs are diversifying. Relying on an office market index now provides insight into only one aspect of the market. What is potentially needed is a new dashboard of indices to help shed light on the overall vitality and economic performance of a city centre. 

That dashboard would continue to include office market metrics, but in addition it would be good to measure other increasingly important parts of the city centre economy. Logically, such a dashboard would also include measures of hotel performance (occupancies, room rates and future supply), retail performance (vacancies, rents and turnovers), commuter traffic numbers (which should be readily available in real time via key transport corridors and public transport stations), performance of restaurant and catering establishments, and performance of the residential apartment market (vacancies, rentals and sales prices along with new supply). 

Not only do these uses contribute substantially to CBD employment and economic activity, they are also increasingly the focus of considerable public and private investment. There are compelling public policy and private industry reasons why a broader assessment of CBD performance is now timely. Those founding members of BOMA who were once focused on investment in CBD office buildings have evolved over time into institutions and private developers/investors with interests across the spectrum of built form uses now increasingly evident in our CBDs. 

The OMR served us well for 40 years and while an ongoing focus on office markets will remain important, the extent of changes to our CBDs means it alone is no longer sufficient as a measure of city centre economic performance or future prospects. 

Peak CBD? Where the urban jobs are going.

The changing economy is an irresistible force, the impacts of which are being played out on many fronts. As jobs and the nature of work change under the relentless advance of technology, so too are decisions about where workplaces should be located. Central business districts – long the glamourous headquarter preference for leading professional service firms – are under increasing pressure from competing centres. Contrary to popular belief - and no doubt to the disappointment of inner urban boosters utterly fixated on the virtues of a downtown live/work/play lifestyle to the exclusion of all else - the non-central parts of our major metropolitan regions are the ones that are growing jobs at the fastest rate.

The reality of suburban dominance on housing and economic fronts is something I’ve been writing about for some years now and every time I consult fresh data, that reality is confirmed. In our major metropolitan areas, it is the suburban domain where more than 80% of jobs are and where nine out of ten people choose to live. This isn’t to deny the CBDs their premier role as the seats of government or as a central focus for community-wide cultural facilities, executive business offices and places for social interaction.  But it does point to a possible imbalance in infrastructure priorities or policy attention – the bulk of which seems now to favour privileged inner city domains to the exclusion of economically larger suburban locations.

The latest labour force data from the Australian Bureau of Statistics paints the evidentiary picture. Taking in our three largest metropolitan areas, employment growth in the inner city areas over the last five years is not the dominant story some might have you believe. 

The labour force data is by SA4 level, which broadly means for metro areas something much larger than a suburb but smaller than a city. It typically combines multiple suburbs into a population group of 300,000 to 400,000. 

The chart below shows jobs growth of non-central parts of our metro regions in blue, while the CBD and inner city regions are highlighted in red. (click on the image to expand)

What’s immediately apparent is how many blue non-central locations are outperforming the inner city regions. Cities may well be the engine rooms of the economy but it’s evident from this data that those engines, in job terms at least, are producing more output in the suburbs. 

In fact, of the total 468,300 new jobs created in these three large urban areas in this five year period, 91% of them were created in non-central locations. 

Keep in mind that this definition of inner city is much broader than just a CBD and fringe, as popular opinion and industry convention might define the inner city. For Brisbane, its boundary stretches from Toowong to Bardon, The Grange, Clayfield and south to Seven Hills and Norman Park. 

For Sydney, the ‘City and inner south’ stretches from the CBD south to the Airport, and as far west as Marrickville. 

And in Melbourne’s case, the “Melbourne inner” area follows the Maribyrnong River in the west, north to Essendon North, across to Coburg, Fairfield and south as far as Malvern and Ripponlea.

The point being that these are very generous boundaries for inner city areas. They are large enough to include dozens of inner city suburbs and some that are considered middle ring. And yet despite these large boundaries, it was the areas that lie beyond these inner city areas that have been powering the jobs growth performance of our major cities. This economic reality may not sit well with the true believers of inner urban supremacy, but it is statistically undeniable. 

The strongest performance of all was Melbourne West, which added over 60,000 jobs in the five year period. The Gold Coast, bouncing out of one its many cyclical downturns into an upswing, was second, followed by Brisbane Southside, followed by Parramatta. All are what we would generally define as middle to outer urban areas (the Gold Coast being either its own distinct city or part of the south east Queensland conurbation, depending on your point of view). 

If we look at the numbers in percentage terms, there are a significant number of SA4 regions that have grown by more than 10% in the period. 

Of the three inner city markets, only Sydney just crept into this league. Inner Melbourne’s 3.8% growth is anemic by comparison with the suburban performance of many of its metro areas, and Brisbane’s inner city growth of 7% over the five years looks weak compared to its Southside, or Moreton Bay regions which grew by double that in the same period. 

What’s driving this suburban growth? 

Looking at the four fastest growing regions of our largest metro areas, the answer is mostly ‘health care and social assistance.’ This type of industry, which is Australia’s fastest growing at present, has little need for centralised locations but requires access to the communities it serves, which are largely to be found in suburban locations. In the case of the Gold Coast, having a new major hospital open in this period obviously helps. Health and social assistance is broadly followed by education and training (another non-centralised type of industry) and then there’s also retail trade (non-centralised by nature) followed by various other more localised strengths.

The so called ‘knowledge workers’ are represented by the ‘professional, scientific and technical services’ category which also made significant contribution to the four fastest growing areas. This is an interesting feature of the changing economy because it was a long held article of faith that knowledge workers (white collar service industries from engineers to architects to bankers and lawyers) would always instinctively gravitate to CBDs. This remains mostly so for larger firms but increasingly we are seeing these functions also select suburban centres which offer lower cost structures and a more village scale amenity that rivals the large scale and anonymity of a large bustling CBD.

So what’s this telling us?

There is a growing orthodoxy which claims that it will be the professional services industry that drives our growth as a nation. No argument there. But the orthodoxy then seems to go on to suggest that workers in the professional services industry will all (mainly) be working in our CBDs and inner city areas, and that the sensible strategy for supporting that growth in the future is to funnel greater concentrations of infrastructure into servicing this demand, and to support further rapid escalations in inner urban density so that more people can live closer to their inner city jobs. This, we are told, is where all the action is and where it’s going to continue. 

The evidence, however, keeps resolutely pointing another way. Rapid changes in business and personal mobility thanks to digital technology are paving the way for businesses to be more flexible in their location choices. Plus, the fastest growing industries at present are not the types of industries that need the highly centralised and densified work and living arrangements found in our CBDs. 

Our CBDs will continue to maintain their headquarter function for many businesses, and will continue to the seats of government, but it may well be that their role as a central business district will begin to morph into more of a central amenity district – providing cultural, entertainment and recreational opportunities for the wider metropolitan community that cannot (due to cost or other factors) be replicated many times in suburban areas. 

If this is true and we are living through a period of fundamental economic change in business location decisions, the role and importance of suburban business districts will only continue to increase. This should mean that – along with identifying infrastructure priorities for inner urban areas – we need to turn our attention to the equally valid claims of growing suburban centres for improved economic and social infrastructure.  
The evidence is that some 90% of new jobs in our largest urban areas over the last five years were created outside the magical inner city ‘rings’. Recognising this statistical reality will be the first step toward a more balanced approach to urban growth and the setting of urban economic priorities.

Footnotes:

These SA4 statistical boundaries are very large areas, useful for general analysis like this but the larger the area, the more complexity hides behind the numbers. For example, within some of the inner city SA4 areas, it is entirely possible that within the SA4 boundary actual CBDs are shrinking while near city areas are growing, or the opposite. You need to drill down to a smaller area to answer that question. Let me know if you are interested to find out.

Nor can I explain the abnormally strong performance of West Melbourne in this data, nor the weak performance of Logan-Beaudesert (south of Brisbane). I am looking further into both. It could be due to a small boundary change (although the ABS makes no mention of it that I could find) or due to mixed industry areas jumping boundaries as brownfields close down in favour of newer development areas next door. 

The very strong performance of many Sydney regions, including those near the inner city, is also worth comment. Six out of the top ten fastest growing SA4s are in Sydney. The story of Sydney’s increasing national economic muscle is something I wrote about here. Sydney is at present dragging the rest of the Australian economy along behind it. Without this one city, the technical word for our national economic condition would be is ‘rooted.’

Three different office market stories. Same set of data.

There is a lot of pessimism about the CBD office market in Brisbane at present but is all of it warranted? A lot depends on how you think about the numbers. Here are three graphs dealing with Brisbane markets, all derived from the same data set provided by the PCA, which paint very different pictures of what’s going on. 

Let’s start with the more positive view of things. This graph shows the total occupied space in CBD and city fringe office markets over time. Occupied space simply takes the total stock of space, and subtracts the total vacancies.  It’s the sort of analysis suited to the people who don’t care if the glass is half full or half empty… they only care about how much volume is in the glass, irrespective of how big or small the glass is. 

 

What this indicates is a fairly resilient market. The GFC had almost no impact on occupied space - probably thanks mainly to the mining sector and a rapidly growing public sector at the time, particularly the ‘admin’ functions of government which tended to be housed in the CBD, as opposed to ‘frontline’ public servants (eg teachers, nurses, police etc) who aren’t.  Since the downturn in the resources sector from 2013 combined with the Newman State government pruning its staff numbers to more sustainable levels, occupied space in the CBD shrank somewhat from early 2013. But in the broad scheme of things, this picture is still relatively healthy.

The city fringe market, which was home to a large number of resource based companies and businesses who derived a healthy living from them, has by contrast not suffered much of a contraction. It may have stopped expanding but unlike the CBD, it hasn’t been shrinking.

Still, looking at the figures this way, you would conclude that both markets are generally trending up, with the CBD showing some relatively minor deterioration in recent years but nothing to suggest major alarm bells.

So why all the pessimism? Probably because the industry – along with the PCA who produce the figures – have traditionally focussed on the vacancies. This is the sort of analysis that by its nature appeals to the glass half empty pessimists. They’re not focussed on how much is actually in the glass, they’re worried that they’ve got a very big glass which isn’t as full as they’d like it to be. If anyone brings an even bigger glass and the same contents are poured into it, they become desperately worried. 

This graph shows total vacancies in CBD and fringe markets over time.  Little wonder people are feeling a bit glum. Office vacancies, on the back of some shrinking in occupied space plus the addition of some stock, are approaching 350,000 square metres. That’s like six Waterfront Places of space, all empty (but not of the same grade). Not only that, but there is more stock in production, which will mean bigger glasses and more empty space. The city fringe has fared relatively better. CBD vacancies have more than trebled since 2003 but fringe vacancies have only slightly more than doubled. Not a huge compensation, but maybe some relief to city fringe owners. The contrast with the very tight market conditions in 2008 is stark however, and the growth in vacancies since then, dramatic. 

Of course the real story is in what these dynamics are doing to rents. Incentives are rising and real rents are falling. Some of the sublease deals doing the rounds in Brisbane at the moment are said to be ‘very attractive’ – which is industry-speak for dirt cheap. Certainly well below replacement cost. Tenants can exploit the current market and move up a grade or two of space but still pay the same rent. Low grade office space will be the hardest of all to lease, and owners will explore alternative options – as they have been doing in the form of hotel or apartment conversions. (Why haven’t more explored education related options, or even retirement living options? If they have, they’ve kept it quiet).

The city fringe markets I’m told have fared better in terms of rents and aren’t exposed to the same levels of discounting. It’s reaching the point where the cost of high quality space in city fringe locations isn’t much cheaper any more than sublease CBD space. My guess is that’s going to discourage any further major moves from CBD to fringe locations, for a while at least.

The third chart, also drawn from the same data set, shows a very different picture altogether. This is the chart for people who like to think about the larger picture. This chart shows the CBD’s share of the combined occupied space of both the CBD and fringe. In other words, combine the volumes in both glasses and work out who has more.

In 2003, the CBD had 70% of the occupied space in the combined CBD+fringe markets. I would bet my left you-know-what that prior to this, the proportion was higher still. Go back another decade and it wouldn’t surprise me if the CBD had 85% of the combined space. It’s now at 55% and the clear trend is down. In short, the importance of the CBD is shrinking relative to the total inner city office market.

So what? This brings into focus a whole range of additional questions: are businesses being driven out of the CBD by cost-push pressures; is there something fundamentally more attractive in the fringe; what role does the cost and availability of carparking play; what are the implications for public transport which relies on a CBD centric hub; to what extent does the shift represent a change in the nature of how businesses and people work with new technology; if the trend continues at this pace, what are the longer term implications for development, investment and public policy?

In all the discussion about CBD office market trends, it strikes me that some more time investigating the third chart would be time very well spent. 

Parking

Australian cities have some of the highest carparking costs in the world. Why? Can anything be done about it? And what might happen if it gets any worse?

It’s hard to fathom but the cost of parking a car for a day or even a couple of hours can apparently cost you more in an Australian CBD than downtown Manhattan, or London, or Paris. The latter are  global centres of commerce, with populations that dwarf that of Australian cities. New York City’s 8.4 million residents are the almost the equivalent of our three major capitals - combined. Ditto London, with its 8.4 million residents or Paris with 10.5 million residents.

Manhattan Island alone has 1.6 million residents, plus it adds another 1.6 million commuters, every day, swelling daily to over 3 million people. By comparison, the City of Sydney (the CBD plus surrounds) is roughly equivalent in area to Manhattan Island but home to only around 190,000 residents and a daily influx of workers and students of around 450,000. Yet it can cost more to park in Sydney, or even smaller cousin Brisbane (under 200,000 employees in the inner city), than Manhattan. 

Why? 

On the supply side, there has been a history of anti-car planning culture in many Australian cities for some time. Sydney was the first to impose a parking tax on CBD car spaces, in a bid to force up the price of parking and divert people to public transport. It forced up the price alright, with a number of subsequent increases in the tax over the years (the tax is now around $2000 per car space), but it made no real impact on public transit. 

Here’s an example of the thinking from then NSW Transport Minister David Campbell back in 2009: 

"The parking space levy is all about encouraging people to leave their car at home, and take public transport," he said. 

In the same story, it took someone from the Nature Conservation Council (the irony is delicious) to point out the bleeding obvious:

“I don't think it will have too much of an impact on congestion… Any increase in parking levies probably isn't going to make too much of a difference to the people who can afford it right now, what it will make a difference with I suppose is the people who really don't have any other options and are currently driving in."

Incredibly - and idiotically - the South Australian Government is trying the same thing with Adelaide, where a $750 per annum parking tax takes effect this July. You’d think they’d be desperate to bring any economic life they could find into Adelaide, but evidently if that economy arrives in a car, they don’t want it. Great place Adelaide. All it needs is an economy to go with it.

The punitive policy stance on CBD parking visits itself in other forms too. Restrictions on building new CBD parking spaces has had the effect of limiting supply as the cities grew. New multi-deck parking stations could alleviate the supply-side problem, and there seem to be enough sites suited to them in most cities, but the policy stance doesn’t support them. New commercial towers are also limited in terms of the numbers of additional basement spaces they can deliver into the pool, in a bid to limit the supply of additional parking. 

This public policy view is connected to deeply held faith (and the operative word is ‘faith’ because there’s little evidence to support the view) that by pricing or policing private vehicles out of Australian CBDs, the same people would be forced to use public transport, and we’d all be better for it. “We just need to get the cars out of the city” is the sort of view you’ll hear often on talk back radio (particularly the ABC; sorry Aunty but your listeners have been drinking way too much Kool-Aid). 

The problem is simple: if you take the cars out of the city, you’ll take the people too. And then the businesses will follow. 

Bear in mind is that parking is not just about commuters. CBDs and inner cities are places for business to interact with other businesses, and with government. They also interact with customers, clients and suppliers. They have restaurants and retail shops that rely not just on the CBD worker but also visitors to the CBD, for the retail dollar. Many of these people invariably rely on the private vehicle to get there. Casual parking costs – at up to $55 for a couple of hours – have long passed the point where they’re a deterrent: they’re a real disincentive to visit the CBD for casual business meetings. Permanent parkers with paid company spaces won’t notice this. But they may begin to wonder at the number of meeting requests for out-of-centre meetings, where the parking cost isn’t ten times the cost of the coffee. 

If the intent is to ‘punish’ the private vehicle in the belief that this will encourage higher rates of public transit patronage, the irony is that the consequence could see more businesses relocate to outside city centres, where parking regimes are more favourable and occupancy costs lower. If that happens, the numbers of office workers for whom train and bus services are a convenient option will actually fall – because public transport options in non-central locations are notoriously difficult to service and often require mode or route changes for a single trip. 

Centralised employment is what works for public transport so it ought to be in the interests of public transport advocates to support more CBD employment and more widely available parking (both in supply and pricing) than to argue for punitive agenda-based policy positions which may deter businesses from city centres. In short, if you succeed in chasing cars out of the inner city, you may also chase business out and end up with more private vehicle transit for work journeys than if they had stayed in the CBD.

The reality too is that public transport will only go so far. In Australian cities, the highest patronage of public transport by CBD workers is by people who live close to the city in the first place. Travel beyond a 5 klm or 10 klm ring and the mode share by public transport drops quickly to below 10% (see here for an excellent analysis). 

The reason is that – contrary to popular opinion – only around 10% to 15% of metro wide jobs are in the CBD and inner city. If you have a CBD job, you tend to earn more, and will want to live closer to your work. Ironically, this makes you also more likely to take advantage of very generous taxpayer subsidies for your train or bus fare to work, than the suburban worker who gets no such subsidy for commuting by private car to their lower paid job in a suburban location. And because most employment is distributed throughout suburban locations of our metropolitan areas, these are always going to be more suited to private vehicles than public transport. 

To get our public transport usage up to even half the rate of somewhere like New York – where 55% of commuters use public transport - we would need to see employment concentration in our CBDs quadruple to 40% of metro wide jobs while suburban employment didn’t grow at all. 

Hardly even a remote possibility. 

On the demand side, we seem to have a capacity to pay when it comes to parking that is allowing operators to charge what they do. However expensive the spaces may be, they do seem consistently full. Arguably, for many there is little choice. There is also little competition, with only a couple of operators seemingly controlling the market. But it is fair to question whether the exorbitant rates now being charged – especially for short term parking – won’t in time begin to change behaviour. If that behaviour begins to lead an exodus of activity to non-central locations, prices should fall as demand weakens. But that may create other, larger problems as suggested above.

So how should we deal with congestion and parking policy and public transport? 

There is no easy answer here but I’d suggest that reliance on proven failures like parking taxes or similar pricing policies in the Australian context is not a good option. It might be helpful instead to get a solid grasp on all the factors driving the high cost of parking – including oligopoly pricing by a small handful of operators. 

We also need to understand clearly the benefits of city parking before treating it like a disease and trying to eradicate it, or the patient will suffer. And we also need to be very clear on what alternatives exist and the genuine likelihood and extent to which public transport can replace the private vehicle, given our urban scale and the nature of our urban economies. 

Office market drivers

There’s a lot of hand wringing at the vacancy rates being reported for office markets at the moment but in more than 20 years, the analysis hasn’t progressed much beyond basic questions of new supply and gross demand. Other factors are at work.

The latest Property Council office market survey reports Brisbane CBD vacancies as ‘the highest level on record’ at 14.2%. That’s up from 12.8% the year before. The report attributes this to weak demand, specifically a “reflection of the impact of the Queensland Government’s continued withdrawal from leased space, coupled with the mining sector’s revaluation of its office space requirements.”

No, it’s not a pretty number and according to the PCA figures it’s at present the worst of major markets in the country:

But these are just headline figures. Sure the Queensland Government has reduced its requirement for space, but that followed a sustained period of bloated public sector growth under the previous government. And sure the mining sector isn’t on fire any more, but no one seriously thought it would ever stay that way. That’s why mining related businesses were only taking space on 5 year leases: they knew themselves this wouldn’t last.

So beyond the headlines, what are some of the other things that might be driving change in the market?

First, remember that a 14.2% vacancy rate is the same as an 85.8% occupancy rate. Most industries with that sort of capacity utilisation would be over the moon. It’s a quirk of history that office markets have always reported on vacancies rather than focus on the occupancies. That’s unlikely to change but what it means to seasoned observers is that this isn’t the calamitous disaster media headlines might have us believe. Plus, take into account that a fully occupied market is generally regarded to be around 95% occupied; that 5% vacancy being required for normal movement. Any less and the market is under supplied. So really we’ve got about 10% of surplus space sloshing around in the market now.

Much of that space is sloshing around in lower grade buildings and what typically happens is that these are withdrawn from stock because they can’t compete with contemporary space and the facilities it provides. Owners can refurbish older buildings, or convert them to alternate uses such as residential or short term accommodation. Expect a lot of both to happen in coming years. Those stock withdrawals will to an extent offset stock additions through some of the new projects under construction.

On the demand side, apart from blaming a downsizing by government and mining tenants, what other factors are in play?

Rents are surely one. Talking about office space demand without mentioning rents is a bit like talking about demand for petrol without mentioning the price. High construction costs, site acquisition costs and development costs mean that delivering new CBD office buildings is not a cheap exercise. Our CBD rents are some of the highest in the world. This Cushman & Wakefield report makes for interesting reading. According to the report, Brisbane is roughly 80% of Manhattan Grade A prices, is more than Melbourne, is 50% more than Houston Texas and three quarters of Sydney rents. Sydney rents are higher than New York. Go figure that one. Ask Holden, Ford or Qantas about the globalisation of markets and what happens to Australian product that is overpriced. Will that affect demand for office space if companies simply shift operations elsewhere, or are they faced with no choice but to pay globally high rents for what are not global scaled cities?

The other effect of high CBD rents is also force some hard thinking about the relative benefits of CBD over fringe. A lot of companies have recently opted for the latter. This could also be affecting demand for space in key CBD markets.

Floorspace ratios are another factor at play. New tenancies for major business are often being designed around per person space ratios as low as 10 metres per person. Concepts like ‘hoteling’ where staff don’t have their own desk and where personal effects are discouraged, have fad surfers enthralled and financial controllers impressed. Personally, I can’t see this lasting. We’re human beings after all. Plus, it’s only ever a handful of companies that explore the boundaries of these management fads and seek publicity for doing so. The silent majority of office tenants are as inefficient as ever, with spare desks and large common areas so the average in my opinion still works out at around 20 metres per person. Either way, it’s an important factor on the demand side which isn’t discussed much.

Parking costs are another factor. This is more a problem for casual parkers than permanents but both are paying exorbitant prices. If you are CBD based and have clients visiting your office, you should feel some sympathy for the $50 they’ll shell out just for a two hour visit. These are some of the highest costs in Australia and equally some of the highest in the world. Those urban planners wanting to ‘keep cars out the city’ may succeed if this pricing response to limited supply keeps following the same trajectory. But if you keep the cars out of the city, you’ll keep the people out too, and along with them, their business. The very high cost of parking, both for tenants and customers of those tenants, could be another factor weighing against demand for CBD space.

These are just some of the considerations that reach beyond the basic numbers. There are more but the point is that a 14% vacancy rate owes itself to a wider range of market forces than superficial reports deal with. 

Is 14% a cause for concern? That depends on where the vacancies are… in someone else’s building or yours.