Key findings:
- As at Q1 2017, the national office vacancy rate as recorded by SAPOA was 11.1% – up 40bps on the quarter before. In square meters terms, an aggregate of 32k sqm was occupied during the past quarter whilst 111k sqm of stock was added to the survey sample – the result: a negative net absorption of around 78k sqm.
- Asking rental growth has slowed significantly on a year over year basis – indicative of the current low growth environment coupled with an excess supply in the market.
- A significant factor driving the excess demand currently prevalent in the market is the amount of space ‘left behind’ by large corporates consolidating their real estate operations. The backfill risk has already contributed to increased vacancy rates in certain nodes with the potential for more as several large development projects come on line in the short term.
- The sideways trend in the overall vacancy rate remains firmly in tact following Quarter 1’s 38bp uptick. 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. The three quarters ended March 2017 has been a net of 127k sqm leakage of space after a 68k sqm net absorption in Q2 2016.
- The latest quarter saw a 80bp improvement in the vacancy rate of Prime Offices from 4.0% to 3.2% whilst the A, B & C grade offices increased by 50bps each with C-grade offices increasing by 30bps to end the quarter at 16.7%.
- On a municipal level, the lowest vacancy rate at quarter end was recorded for the City of Cape Town with 7.5%. Whilst the City of Cape Town’s office occupancy rate as a whole was only down 10bps on the quarter before, 5 or 7 nodes actually recorded improved occupancy rates.
- The highest vacancy rate amongst the larger metros was the 12.3% recorded for both the City of Joburg and Ethekwini Municipality. Both of these node’s vacancy rates is driven by their inner cities with vacancy rates of 20.2% and 17.6% respectfully.
- The office sector recovery is becoming increasingly fragile. Whilst the aggregate vacancy rate is still moving sideways broadly, signs of weakness are becoming apparent, especially the recent slowing in asking rental growth which was negative in inflation-adjusted terms at quarter end.
- Capital investment into financial and business services remain negative for the quarter March 2017, bringing into doubt the strength of the current recovery and raised the probability of another upward leg in the vacancy rate trend.
- Any future improvement in the vacancy rate and the asking rental growth depends on a strengthening of the underlying demand drivers most notably financial and business services employment growth & capital investment. Given the recent credit ratings downgrade and potential impacts thereof, it is hard to imagine the national office vacancy rate returning to mid-single digits within the next 24 months.
- That said, leasing opportunities do exist – evident in the fact that 23 of 53 nodes reported improving occupancy rates over the past quarter and 22 nodes currently have vacancy rates of sub-8%.
Read more here: SAPOA Office Vacancy Rate April 2017
