Commercial Building Costs Increasing at Double the Rate of Inflation

The latest figures from Turner & Townsend reveal that, over the last decade, operational costs for commercial buildings have increased by double the rate of inflation and four times the rate of construction cost increases.

The company compared increases in the cost of rates, electricity, insurance, maintenance wages, cleaning and security in Sydney, Melbourne, Brisbane, Perth and Adelaide. These were compared with cost movements for the consumer price index and the cost of non-residential construction from the Australian Bureau of Statistics data.

Turner & Townsend Senior Economist Gary Emmett said overall operational expense items have increased by 58 per cent during the last decade, whereas CPI inflation is up by 28 per cent and the cost of non-residential construction has risen by 16 per cent over the same time period.

“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," Emmett said.

“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 per cent 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," Emmett said.

"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.

“Rates have consistently increased at higher 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," he said.

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

“Higher Council rates reflect a need to increase revenue," he said.

"Average rate increases of around four percent are currently below the ten 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 per cent 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.

Emmett said 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," he said.

"However, Melbourne and Brisbane are also looking to experience a surge with several new projects poised to start.”

Turner & Townsend's findings across the past decade suggested businesses should be mindful of the additional costs of building ownership as costs typically spiral upwards.

Statistical analysis also reflects that operating cost increases across the states were fairly evenly spread, with Brisbane marginally higher. Electricity costs have risen by 144 per cent in Brisbane within the past ten years, compared to 114 per cent nationally.

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