The new edition of Australian Construction Outlook – Non-Residential Building is the latest report in Macromonitor's series on the outlook for construction in Australia.
"The sharp decline in non-residential building in 2008/09 was more than reversed in 2009/10, as a result of the huge injection of funds by Federal and State Governments in education and health," says the report's author and Macromonitor director, Nigel Hatcher.
"While commercial and industrial building has continued to decline during 2009/10, government and other social building has had its biggest ever one-year increase," says Hatcher.
The report notes that the value of total government and other social building work commenced more than doubled in 2009/10, pushing total non-residential commencements up by an estimated 28%, in real terms, despite a further 27% fall in commercial and industrial building.
Macromonitor predicts that 2009/10 will be the lowest ebb in the cycle for commercial and industrial building commencements, with a gradual recovery to begin in 2010/11.
Hatcher notes that, "Many areas of commercial building remain dogged by oversupply and continued weak demand. Absorption of office space, guest arrivals in the hotel sector, retail turnover, demand for manufactured goods, are all improving, but are still weaker than they were two years ago during the peak of the boom in mid-2008. The renewed strength of the Australian dollar during 2009/10 was also not helpful for investment in some sectors."
Macromonitor expects modest growth in commencement volumes for commercial and industrial building categories in 2010/11, gaining momentum over the following two years.
The report forecasts the office sector will be the last to recover. Hatcher comments, "The office sector has been affected by a constrained financing environment, a large amount of space coming onto the market and weak absorption. The average vacancy rate across Australia's major office markets will shortly hit a peak of around 10%."
Macromonitor expects declines in office vacancy to start during 2010/11, and a significant recovery in office building commencements is forecast for 2011/12.
"While the commercial and industrial sector slowly picks up pace over the next two years, government building work will plunge dramatically, causing a two-year decline in total non-residential building commencements," according to Hatcher.
"From this point, education building will fall back sharply to more normal levels, while health building will actually increase in 2010/11, before also declining," says Hatcher.
The Macromonitor report notes that education building work commenced increased from less than $4 billion in 2008/09 to an estimated $13.8 billion 2009/10 (in constant 2007/08 prices). Macromonitor expects commencements of $8.2 billion in 2010/11 and then a more normal level of $4.6 billion in 2011/12.
In the health sector, Macromonitor expects commencements to rise further in 2010/11, assisted by the COAG agreement on health reforms, but more fundamentally as a result of long-planned hospital projects such as the new Children's Hospital in Queensland and new Royal Adelaide Hospital. But Macromonitor then expects health building to also gradually decline back to more regular levels, starting in 2011/12.
Hatcher concludes that "the overall outlook for non-residential building is a combination of gradually accelerating increases in commercial and industrial building and gradually accelerating declines in government work."
On Macromonitor's forecasts the net result will be real declines in total non-residential building commencements over 2010/11 and 2011/12, of 7% and 12% respectively.
