What government cutbacks mean for commercial property investors

Can commercial property investors continue to rely on the government? Yes, but probably less than previously — due to both the state and the federal austerity measures currently being implemented.

Some of the recently announced public service layoffs will remove the "automatic" component of government take-up from the CBD office demand equation. But that's not altogether a bad thing.

It simply means that more major development activity going forward will be by pre-commitment, rather than wishful speculation.

This is already being evidenced in Brisbane, where Campbell Newman is planning to relocate his public service requirements to the waterfront. And likewise in Perth, the state government is also looking to decant some of its CBD office needs to the suburbs.

Right around Australia, all levels of government are now seriously reviewing their accommodation requirements and how effectively they use their current office space.

Who occupies what?

According to a recent report by Colliers, government occupies about 25% of all CBD space across Australia. And as you can readily see from the graphic above, Canberra and Brisbane clearly exceed the level.

Melbourne has a fairly balanced "wheel" and also one of the lowest exposures.

Last year, Canberra's overall office vacancy level fell from 13% to 10.8% — which is nothing to really brag about. And the planned staff cut-backs will not help improve that situation.

Slow to change

While governments of all levels may have announced plans to rationalise the CBD office needs, they are renowned for moving slowly, with their implementation. And historically, whole floors have often simply remained vacant following previous staff cuts.

Furthermore, government tendencies have struggled to meet the private-sector workspace ratio of 10 to 12 square metres per person. Instead, most fall within the 15 to 20 square metre range, but some state government tenancies actually exceed that.

Bottom line: While government cut-backs may initially cause some concern for some CBD office landlords, the vacant space should be readily absorbed as the economy expands.

However, the real beneficiary will be suburban office markets — as government tenants seek modern space and a lower rent profile.

Therefore, as an owner of suburban office space you will begin to see a new large player entering the tenancy market. This will help to drive rents up — while still providing government with a lower overall rental bill.

As such, this provides you with a real opportunity underpinned by solid demand.

Chris Lang is an advisor to commercial property investors and gives keynote speeches and regular seminars on the best way to invest in commercial property. He maintains a blog, his-best.biz, which he updates regularly about the best way to get the most out of your commercial property investment.