SAPOA – Office Vacancy Survey – December 2016

Key findings:

– As at Q4 2016, the national office vacancy rate as recorded by SAPOA was 10% – up 20bps on the quarter before. In square meters terms, an aggregate of 84k sqm was occupied during the past quarter while 132k sqm of stock was added to the survey sample – the result: a negative net absorption of around 48k sqm.

– The latest quarter also saw asking rentals continue its above inflation trend by posting a year-on-year growth of 8.3 % – 30bps up q/q. The relatively robust asking rental growth continues to be supply-based rather than demand-driven because current asking rentals are based on a better quality sample than a year ago. The backfill risk associated with large corporate new builds are also becoming apparent with pressure building in certain nodes.

– The fourth quarter of 2016 saw the sideways trend observed in the overall office vacancy rate since 2011 remain in tact – ever since vacancies increased to 9.8% post the recession of 2009. Whilst there have been a couple of quarters of promising uptake of space, this has often been followed by periods of deterioration which has offset the gains.

– Recent data suggests that the fundamentals underlying the office sector recovery remains fragile with the latest economic growth and employment data pointing to a stagnant, flat growth environment.

– Business and Financial services capital investment – a leading indicator of office vacancy rate – slumped by 12.3% y/y to September and is as much as 55% off the pre-recession levels of 2008. This raises the probability that office vacancy rates could deteriorate further before improving.

– The latest quarter saw a 30bp improvement in the vacancy rate of prime offices from 4.3% to 4.0% whilst the A, B & C grade office segments recorded declines in occupancy rates.

– Important to note though is that the improvement in vacancy rate wasn’t broad-based as 27 of the 53 nodes surveyed actually saw occupancy rates slide (11 by 50bps + q/q).

– On a municipal level, the lowest office vacancy rate at quarter end was recorded for the City of Cape Town with 7.6%. Whilst the City of Cape Town’s office occupancy rate as a whole was down by 10bps on the quarter before there was significant movement in the underlying nodes and grades.

– The highest vacancy rate among the larger metros was recorded in the EThekwini Municipality with 12.3%.

– During the quarter ending December 2016, the national inner city office vacancy rate was up 40bps to 15.5% whilst the country’s city decentralized nodes posted an aggregate vacancy rate of 9.2% – 20bps up from the previous quarter.

– At the end of the current quarter, developments under construction totaled 717k sqm (down from the Q4 2015 peak of 982k sqm). Expressed as a percentage of existing market stock, development activity is currently at 4.1% – off the highs of 2007 – 2008 but still on the high side given the absence of growth drivers on a national level.

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

Read more here: SAPOA – Office Vacancy Report – December 2016