SAPOA Office Vacancy Survey – Q2 of 2016

As at Q2 2016, the national office vacancy rate as recorded by SAPOA, was 10.5% – 40bps down from the quarter before. In square meter terms, an aggregate of 143k sqm was let during the past quarter while 75 k sqm of stock was added to the survey sample – a positive net absorption of around 68k sqm.

– The latest quarter also saw asking rentals continue its above inflation trend by posting a year-on-year growth of 9.1% – up from 8.6 % in the quarter before.

– The rise, however, is more product of supply side dynamics than it is demand-driven. Current asking rentals are based on a better quality sample than a year ago with several prime office developments having come on line in the last year.

– Recent data suggests that the fundamentals underlying the office sector recovery are becoming increasingly fragile. The latest economic growth and employment data suggests a stagnant, flat growth environment.

– The latest business confidence number declined to 32 (from an already pessimistic 36) implying an overall negative sentiment among business executives which is likely to see industry decision makers maintaining an increasingly selective approach to capital allocation.

– Business & Financial services capital investment – a leading indicator of office vacancy rates – declined by more than 7% y/y to March, implying that office vacancy rates could deteriorate first before improving.

– The latest quarter saw 1.1% improvement in the level of A-grade vacancy rate whilst the Prime and B-grade vacancy rate softened slightly.

– It important to note that though, that the improvement in the vacancy rate wasn’t broad-based as 17 of the 53 nodes surveyed actually saw occupancy rates slide (many by 1% +q/q).

– On a municipal level, the lowest office vacancy rate at quarter end was recorded for the City of Cape Town with 7.8 % – 70bps up from the quarter before.

– The inner city office vacancy rates remain high and at almost double the level of city decentralized nodes – a similar situation as the previous two cycles when vacancies where nearing peak levels.

– During the quarter ending June 2016, the Sandton node had the largest positive impact by recording an improvement of 1.2 %, thereby contributing around 10bps to the overall decline.

– Other notable contributors to the overall improvement was Randburg, the JHB CBD, Umhlanga and Fourways.

– Development activity continues to be concentrated with 8.5% of office development taking place in 10 nodes with Gauteng office nodes dominating the ranking table. Sandton continues to account for the bulk of the development activity.

– The office sector is still firmly entrenched in its recovery phase – which is, however, becoming increasingly fragile as a result of the sectors macro drivers.

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