Job growth in Australia has been low for some time, with total job numbers advancing by only about 1% over the past year. And some states are struggling more than others. Western Australia, Queensland and the Northern Territory continue to deal with the effects of the mining transition, while the ACT, South Australia and Tasmania have seen low (or even negative) growth in the year to March 2017 (over the previous year). In contrast, Victoria and NSW have recorded strong employment growth in recent times. Over the year to March 2017, Victoria added close to 100,000 jobs, while NSW added a touch over 55,000 (see chart). Chart: Employment growth by State Source: ABS cat. 6202.0 – Labour force Nationally, white collar employment growth continues to outpace blue collar. During the yearto February 2017, there were 122,000 white collar jobs added to the economy, compared with 22,000 blue collar jobs. This reflects percentage growth of 1.5% for white collar jobs, compared to just 0.6% for blue collar jobs. White collar jobs tend to exhibit clustering effects, known as economies of agglomeration. This means that the productivity of knowledge workers rises when they are in close proximity to each other. So while current technology allows interactions to occur virtually and over long distances far more easily than before, what we see is that knowledge workers continue to congregate in office towers and technology parks in their home cities. As such, more office space in city centres is needed to keep up with growing demand. But this hasn’t been happening. In Melbourne, new stock growth in the next two years is expected to be just 1.3% per annum, well under the long-term average of 3.6%. As a result of high job gains and lower levels of office construction, office vacancy rates in Melbourne have dropped to a 10 year low of 6.4%. Not to be outdone, Sydney is even lower at 6.2%. This has been further exacerbated by the withdrawal of office space due to major urban infrastructure projects such as the Sydney Metro project. This project is expected to result in the withdrawal of 62,000 sq.m of Sydney CBD office stock this year, according to Knight Frank. On top of this, the boom in apartment prices has been enough to move development into the apartment market at the expense of office construction. Of the 239,100 sq.m of Sydney office stock withdrawn in 2016, much of this was from conversion to residential or hotel use. As rising demand coincides with stagnating supply, rents for skyscraper offices in Sydney and Melbourne are now rising amongst the fastest in the world. According to the latest Global Skyscraper Index from Knight Frank, Melbourne and Sydney recorded the fastest growth at 11.0% and 10.1% respectively over the second half of last year. This may offset some of the relative benefits of the apartment market over the next few years. All in all, the shortage of office space is unlikely to improve any time soon. Office towers do take some years to plan and build, meaning the outlook for future rental prices relies significantly on what’s already in the pipeline – and the office pipeline is reasonably sparse. So we’re left with a situation where increasing demand, low vacancy rates and a limited supply pipeline is pushing up office rents across NSW and Victoria. David Rumbens is a Deloitte Access Economics partner and co-author of our Weekly Economic Briefing.