This positive property trend could start to ‘fizzle out’
Commercial property vacancy rates are declining across all property classes – however, mounting economic pressure could change this, says John Loos, the property strategist at FNB Commerical Property.
The latest FNB Commercial Property Broker Survey for the second quarter shows that vacancy rates have diminished (meaning space is being used again), while it also points to some business sector expansion at a time when the economy has been coming under significant pressure.
However, Loos said that a slowing global economy, heightened electricity load shedding, and significantly higher interest rates have placed financial strain on commercial property owners, and vacancy rates might start going up again.
The surveys analysed a sample of commercial property brokers in and around the six major metros of South Africa, namely, the City of Joburg and Ekurhuleni (Greater Johannesburg), the City of Tshwane, eThekwini, the City of Cape Town and Nelson Mandela Bay.
FNB further looked into three types of property markets: office, industrial and retail.
The industrial property market’s average vacancy rate is still perceived to be declining, now sitting at -33.3, implying that 33.3% of respondents pointed to a decline in vacancy compared to those indicating an increase.
The office property sectors index level remained negative (improving) but weakened compared to the first quarter at -37.15.
“This still reflects a noticeable broker perception of declining office vacancy rates, albeit weakened from the prior quarter.”
According to Loos, the retail sector’s reading was the strongest, with a negative reading of -58.63, slightly stronger than the -50 in the prior quarter.
These perceptions align with data from other research firms, including the Rode Report, which indicated a national vacancy rate of 14.9% in the first quarter – down from an average of 16% in 2022.
MSCI quarterly Retail data for the 1st quarter of 2023 also indicated that vacancy rates in three out of the five major centre categories were lower than six months prior
“The recent perception of the brokers is thus not way out of line with various data covering last year and early 2023, and more recently in the 2nd quarter of 2023, the brokers continued to perceive declining vacancy rates, albeit with diminishing conviction,” said Loos.
Slowdown
FNB expects the recent declining vacancy trend to stall in the near term due to various economic pressures.
“In May, the SARB continued to lift interest rates. The May 50 basis point rate hike brings cumulative rate hiking since late-2021 to 4.75 percentage points.”
“This, along with ongoing electricity load shedding and a slower global economy, is expected to slow South Africa’s GDP growth to negative -0.1% in 2023, from 2% last year, dampening the prospects for business capacity expansions and growth in commercial space.”
As a result, FNB anticipates all three of the leading commercial property classes to see the decline fizzle out.
Loos said that retailers have come under pressure as consumers have less money to spend in light of inflation. At the same time, the industrial property sector will need to also battle with a recessionary manufacturing sector.
He said that the office market will also be challenged by the continual shift to remote work, with certain companies likely to downscale on space requirements in the challenging financial environment.
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