Market Update January 2025

2025: A Year of Strategic Growth and Optimism for the Built Environment

I hope you enjoyed the break with family and friends and are ready for 2025! As we often do, I thought it would be worth sharing some insights on the industry and market trends in the buildings and property space.

Tier 1 Consultancies' Woes

As you are all acutely aware, 2024 presented significant challenges for many businesses in the buildings and property engineering space. As we have previously discussed, Tier 1 consultancies were impacted most heavily by the slowdown and scaling back of civil infrastructure projects that included significant buildings components.

The squeeze in civil infrastructure, coupled with reduced spending in tertiary education (not expected to recover until late 2025 or early 2026) and social infrastructure, left many scrambling for projects. Contracts and risk constraints meant many Tier 1 consultancies were simply unable to even price work on smaller projects that were keeping key competitors in the Tier 2 space busy. This downturn in work saw a heavy focus on profit and loss, subsequently leading to sweeping redundancies.

Not all was lost for Tier 1 engineering consultancies. Indeed, those who had been able to secure work across the data centre/mission-critical assets and health sectors were able to retain their teams and, in some cases, continue to grow.

Talent Drain to Tier 2 Consultancies

2024 also saw candidates across the industry seek out opportunities within the Tier 2 and Tier 3 spaces. The volatility experienced by many Tier 1 consultancies shone a bright light on two key areas:

• Firstly, the contractual flexibility and insurances held by Tier 2 consultancies allow them to compete across a much broader range of project types and sizes, thus providing a much more stable environment with regards to forward workload.
• Secondly, the freedom experienced by Tier 2 consultancies when it comes to decision-making. Rather than making decisions on a quarter-by-quarter basis to satisfy overseas stakeholders, Tier 2 consultancies understand that retaining teams despite reduced profits in the short term will ultimately lead to a stronger presence and market share in the future—something they will no doubt benefit from over the coming 18 months.

These two factors, coupled with the opportunity for things like shareholding and profit shares, saw a talent drain from many Tier 1 consultancies who had “seen behind the curtain” to large national Tier 2 consultancies where they did not have to sacrifice the types or sizes of projects they’ve enjoyed.

The Year Ahead

While it is easy to focus on the negatives, the year ahead should give us pause for positivity. As recently as this week, Gareth Aird, the Commonwealth Bank’s Head of Australian Economics, stated that he expects the Reserve Bank of Australia to drop the interest rates by 0.25% in February.

While it is unlikely that a change in the market would be reflective of a fire hose being activated, interest rate drops will certainly see the flow of projects start to move again. Yes, a reduction in the cash rate always has an impact on residential apartment projects, but the effect will have a far broader impact on the buildings and property space.

Allow me to outline how this singular act cascades through the industry:

• An interest rate drop sends a positive message to developers who are increasingly wary of escalating costs. Dropping the cash rate at least provides some peace of mind to the private sector that the cost of borrowing money will not add to these escalating costs.
• Reduced cost of borrowing money, in turn, leads to an increase in borrowing capacity, which has a significant impact on “off-the-plan” sales for both apartments and house-and-land packages.
• Lower interest rates increase aggregate demand by stimulating spending. This increase in consumer spending is usually followed by an uptick in economic growth, providing further confidence to the private sector.
• Reduced interest rates also significantly impact urban sprawl and the number of first-home buyers building their first homes in the outer suburbs.
• Increased demand for house-and-land packages will see subdivision projects (which are often staged) kick-start additional stages to meet the demand for land plots.
• Often, town planning for major subdivision projects necessitates the need for developers to incorporate the social infrastructure required to support these new communities.
• Renewed investment in social infrastructure subsequently sees the release of projects like retail and shopping precincts, medical centres, childcare centres, schools, etc., to meet the needs of these emerging communities.

While 2025 is unlikely to see the floodgates open, there is a lot of positive sentiment at the moment. 2025 looks set to be a year of strategic growth in preparation for a very busy 2026!