Sydney has overtaken Tokyo to be the most expensive city in the Asia-Pacific in which to fit out an office. Shortages of skilled resources, material price increases and supply chain disruption are driving inflation in a construction industry that struggled to find enough people even before the pandemic.

The NSW capital, with an average fit-out cost that has risen to $2765 per square metre, has knocked out the Japanese capital – where the average cost of an equivalent project was $2708 per square metre – after five years at the top of the regional list compiled by commercial real estate agency JLL.

The 14.8 per cent year-on-year jump in average fitout costs across Australia outpaced the 4.5 per cent average growth over the region that took in India, Thailand, Vietnam, Malaysia, Singapore, Indonesia, the Philippines, South Korea, China, Hong Kong, Taiwan, Japan and New Zealand.

The effects of a tight labour market, in particular, were driving up costs in Australia as project volumes surged beyond pre-pandemic levels, said JLL’s managing director for project and development services, Scott McCrossin.

‘‘Across the country, strong client sentiment has driven an increase in project volume over the last 12 months which, in conjunction with regional and global headwinds, have led to significant inflationary pressure on construction and office fitout costs.

‘‘Measures to rein in costs have been slowed by global headwinds such as ongoing geopolitical tensions exacerbating the cost of energy and constraining supply chains already under pressure. Damage from weather events – such as flooding in many regions of Australia in 2022 – have further stressed construction costs.’’

Demand for fitouts is booming as building owners reposition their assets to attract tenants or work with occupiers to boost the attraction of a communal workplace and entice staff back to the office.

The report showed the average fitout cost in Australia last year to be $2662 per square metre. Canberra came a close second to Sydney – and also ahead of Tokyo – with an average cost of $2761, followed by Adelaide ($2703), Melbourne ($2676), Brisbane ($2554) and Perth ($2522).

Fitout cost increases will moderate in the next year, JLL says in the report.

‘‘Further price increases will not be sustainable, and many expect the market in Sydney to normalise and the current rate of price increases to moderate amidst talk of a recession,’’ JLL’s Australia Fit-Out Cost Guide 2022/2023 report said. ‘‘The situation is similar in Melbourne with the market stabilising as pent-up demand washes through and activity starts to slow.’’