Lack of supply saves city market

(the graph should say office space market on it)

Lack of supply saves city market

Carolyn Cummins Commercial Property Editor

September 6, 2008

This article talks about the supply and demand with regard to the office space in the Sydney CBD.

According to Cummins the lack of office space is expected to save the Sydney CBD Market from collapse.

Knight Frank’s NSW Research Manager Selina Poyner says that the vacancy levels in the CBD have risen to 4.3 % in the first half of 2008. According to Poyner the reasons for the increase in vacancy levels are the new supply levels and an easing in tenant demand.

In comparison to 2007 the demand for office space in the first half of 2008 has sunk by 73 %. The two major reasons for the decrease in demand are the uncertainty in financial markets and the awareness of the tenants of the importance of wellbeing at the workplace and environmental sustainability of the workplace.

According to Williams head offices of major Australian insurers and overseas banks have been leading forces in the improvement of the working space and the introduction of environment-friendly (green) buildings.

Those owners not prepared to adapt to the current market demands will not be able to keep up with those prepared to offer office space that complies with the tenants needs.

All markets are naturally regulated by supply and demand. A market collapses when there is no demand or not enough demand for the market price to be worthwhile for the suppliers.

An analysis of the Sydney CBD shows that the demand in vacant office space has decreased. One of the reasons for a shift of the demand curve is a special circumstance. In this case the special circumstance is the uncertainty caused by the sub-prime mortgage crisis. Due to major U.S. Banks experiencing huge losses this crisis had an impact on the global financial market. An uncertain consumer only buys the goods he really needs. Therefore a tenant will only rent the office space that is really necessary and not make further investments.

Another reason for a shift of the demand curve is the preference and/or taste of the tenants. Nowadays companies pay more attention to the well-being of their employees and also make the effort to contribute to saving the environment by using energy and water saving technologies. The current supply of office space in the Sydney CBD does not yet meet this new demand.

On the other hand the supply of office space has increased. Due to the shortage of office space for the past few years, many owners saw an opportunity to earn money by renting the space because of the gap in the supply. This trend continued up until 2008 increasing the size of the market, causing the supply curve to shift.

Fortunately the 17% increase in office space supply was not high enough to dispel the shortage in vacant office space. Therefore the lack in vacant office space saved the market from collapse.