Commercial Property Brokers point to declining vacancy rates during Q1 2023

SA's property brokers have signaled declining vacancy rates in the office, industrial and retail markets, according to FNB's Q1 Property Broker Survey.

"This is interesting, because it points to business sector expansions at a time when the economy has been coming under significant pressure from a combination of a slowing global economy, heightened electricity load shedding, and significantly higher interest rates compared to just over a year ago," comments John Loos, Property Sector Strategist at FNB Commercial Property Finance.

While the group indicated that the industrial property sector is still perceived to be on a declining vacancy trend with the retail sector's index level also remaining strongly in a negative (improving) territory, the office sector's rating remains the weakest but nevertheless significant and slightly stronger than the prior quarter which is good news for office landlords - should this perception be accurate.

During the first half of 2022, MSCI annual data recorded an 18.5% national office vacancy rate, slightly higher than the 18.4% recorded in the latter half of the year which reflected a loss in upward momentum in the national vacancy rate, but not yet a decline.

More recently, the Rode Report has indicated a lower national vacancy rate at the end of 2022 compared with the end of 2021. The FNB Broker Survey this suggests that the decline may have continued into early 2022.

By comparison, during the first half of 2022, both industrial and retail national vacancy rates were down from their multi-year highs recorded a year earlier, according to MSCI half-yearly data. In addition, MSCI retail data for the final quarter of 2022 pointed to quarter-on-quarter declines in the vacancy rates of four out of the five major centre categories, with all five being below their highs reached within the past two years which means that recent perceptions by the brokers are not 'way out of line' with various data from last year.

When asking the property brokers for their near-term expectations for the office sector, recently elevated load shedding appears to have added a twist to the tale around remote work whereas increased remote work compared to pre-Covid-19, appears to be entrenching itself in many parts of the world.

In SA, the high load shedding levels can disrupt remote work and the group perceives this to be pushing a significant 'back to the office' move which may have short-term implications for office space demand.

A lack of supply of newly built office space may also be assisting the vacancy rate decline with office building plans passed and building space completed remaining extremely low by historic standards. For the twelve months to January 2023, square meterage of office space plans passed were a sharp -60.4% down on the twelve months to 2019 and space completed was -67.9% down on the same period, never really recovering since the end of the pandemic lockdowns.

In addition, a portion of older unused office space is being repurposed for residential purposes, reducing the overall supply of available space in some places.

At some point, more realistic office rentals should provide some support for demand for office space. As at Q4 2022, Rode national A-Grade office rental data was pointing to a low 3.44% year-on-year growth rate in this category's rental per square metre which translates into a -2.13% decline when adjusted to 'real' terms (using GDP inflation).

However, FNB questions whether this recent declining trend will continue through the rest of 2023 with SARB continuing to increase interest rates. This, along with elevated electricity load shedding and a slower global economy, are expected to slow our GDP growth to 0.4% from 2% last year, dampening the prospects for business capacity expansions and growth in commercial real estate.

The bank anticipates that in the office and retail sectors, the declining vacancy trend may 'fizzle out' in the near-term with retailers coming under renewed pressure from consumers financially pressured by high inflation and rising interest rates.

Industrial real estate, the strongest market of the three, may have further to go before seeing its vacancy rates rising, with the brokers pointing strongly to significant shortages of space in this market.