WORDS: DEBBIE HATHWAY :: PHOTOS: SUPPLIED
The rate of office vacancies has been decreasing, but there are concerns that economic pressures in 2023 could hinder this trend
South Africa’s office vacancy rate has shown improvement in Q1 2023, following a record high of 16.7% in Q2 2022. The SAPOA Office Vacancy Survey indicates that the overall vacancy rate at the end of Q1 2023 was 15.8%, a decrease of 30 basis points from the previous quarter. The survey, which included 3,108 office properties across 52 nodes and a total gross lettable area of 19.1 million square metres (including properties under construction), provided the most recent data.
In contrast, during Q1 2022, South Africa experienced another record high in office vacancy rates, particularly for prime office spaces, as reported in the SAPOA Office Vacancy Report Q1 2022. The report analysed 3,093 office assets across 52 nodes and a total gross lettable area of 18.8 million square metres.
THE HIGHS AND LOWS
Vacancy rates declined across all grades, with the B-grade category having the most significant impact on the overall vacancy rate. SAPOA classifies Grade B buildings as generally older, but with accommodation and finishes close to modern standards because of refurbishments and renovations. Other specifications include air conditioning and on-site parking or bays dedicated to the building, a minimum ceiling height, less flexible floorplates, and modest landscaping with minimal exterior space.
Meanwhile, the A-grade vacancy rate reached another all-time high by the end of the quarter. This applies to high-quality properties that provide good access and are professionally managed with continued above-average maintenance. Other requirements include high-quality modern finishes, air conditioning, adequate on-site parking, a well-defined, easily visible entrance, a lobby with clear circulation and high ceilings. Flexible floorplates are likely.
Meanwhile, John Loos, Property Sector Strategist at FNB Commercial Property Finance, notes that respondents to his Q1 2023 FNB Property Broker Survey have seen a recent decline in vacancy rates across all three major commercial property classes.
Loos questions whether this trend will endure throughout the year. “As of last week, the SARB continues to lift interest rates. The January 2023 50 basis point rate hike brings cumulative rate hiking since late-2021 to 4.25 percentage points. This, along with elevated load shedding and a slower global economy are expected to slow South Africa’s GDP (Gross Domestic Product) growth to a low 0.4%, from 2% last year, dampening the prospects for business capacity expansions and growth in the commercial space,” he says.
GOOD NEWS FOR OFFICE LANDLORDS
Loos says the industrial property sector is the strongest of the three markets. Significant space shortages mean this land is in demand, so the market has “a way to go before seeing its vacancy rates rising.”
Moreover, the brokers’ rating (on a scale of one to 10) of the industrial property rental market activity at 7.3 remains strong, followed by retail’s 6.54 and the office market’s 6.07.
Although the survey highlights a negative office sector reading of -46.5, it is still better than the -37.5 of the prior quarter, which is encouraging for those office landlords who have suffered high vacancy rates in recent years.
Rode’s Report, which analyses and reports on most sectors of the property market in the major, and some secondary, cities in South Africa, indicates a lower national vacancy rate at the end of 2022 compared with the end of 2021. This could result from economic activity and social interaction returning to normal following the 2020 lockdown recession.
IMPACT OF LOAD SHEDDING
According to the brokers surveyed (in the FNB Property Broker Survey), the recovery of business post-Covid-19 in 2021 gave rise to new smaller companies and the expansion of existing operations resulting in the requirement for more space in all three property classes.
Commenting on their near-term expectations of rental market activity levels linked to the demand for office space, the brokers responded as follows:
Increased load shedding could see remote workers returning to the office environment where generators help prevent downtime due to lack of power, light and internet connectivity.
There needs to be more newly built office space. For the 12 months to January 2023, square meterage for office space plans passed was down -60.4% compared to a decrease of -67.9% for the 12 months to 2019, showing limited recovery since the end of Covid-19 lockdowns.
Moreover, some older unused office space is being repurposed for residential purposes, reducing overall supply. As office rentals become more realistic over time, demand for space will stabilise at a new lower equilibrium level.
Employment rates in sectors such as the Finance, Real Estate and Business Services Sector (FREBS) show a slight year-on-year decline in 2022 compared with 2021, supporting the perception that office space demand should not increase enormously.
Loos concludes that the effect of load shedding on the work-from-home trend and improved use of desk allocations through the hoteling of space (that enables employees to reserve and use non-dedicated, non-permanent workspaces as they need them) can reduce the need for office space for many. “So, while pointing to a recent decline in office vacancy rates, a considerable downward revision of many companies’ space needs is still possible. We would thus be cautious to conclude that we have reached a sustainable decline in office vacancy rates just yet,” he says.
