The most recent second quarter StatsSA Employment Data is not good news for the battling Office Property Sector.
FNB places emphasis on the employment trends in the major finance, real estate and business services sector to drive the demand by companies for office space.
And in the second quarter, this sector’s total employment saw its growth rate slowing to 1.65% year-on-year, from 2.48% in the prior quarter, the fifth consecutive quarter of year-on-year growth slowdown since the 3.6% multi-year growth high reached in the first quarter of 2017.
While the year-on-year rate remains in positive territory, and slightly above the national non-agricultural employment growth rate of 1.41%, on a quarter-on-quarter basis the rate turned negative to the tune of -0.6% for the first time since the first quarter of 2017.
This suggests little if any growth in overall demand for office space in the near term, and assuming some level of technology-driven space saving improvement (a rising portion of the labour force working remotely or workplace densification), demand for office space could even decline in such a weakening employment environment.
Slowing finance, real estate and business services sector employment growth can exert upward pressure on office vacancies
Slowing employment growth in this office-relevant economic sector, contributing to slowing demand for office space, could exert upward pressure on the national office property sector vacancy rate.
In recent times, SAPOA Office Vacancy data has not pointed to a noticeable rise in national vacancy rates. The national de-centralised node office vacancy rate, where 77.8% of total office space sits, was estimated at 10.3% in the first quarter of 2019, which represents an almost-sideways movement from 10.4% as at the second quarter of 2017. Prior to 2017, FNB has seen a broad increase in this vacancy rate all the way from a low of 2.3% reached early in 2008.
From the first quarter of 2017, the smaller CBD Office Market actually showed a decline, from 13.8% in the first quarter of 2017 to 11.9% by the first quarter of 2019.
This recent period of relative stability in the SAPOA vacancy estimates could possibly be due in part to that “mini-surge” in finance, real estate and business services sector employment growth to reach that peak of 3.6% year-on-year by early-2018 (prior to slowing thereafter).
But all other things equal, the more recent slowdown in this employment growth rate raises the risk of renewed increase in the vacancy rates.
But slowing growth in existing office stock can in part counter the vacancy impact of a slowdown in office space demand
All other things aren’t equal, however, with the growth rates in SAPOA’s estimates of the national existing office stock (square metres’ worth) having also slowed, decentralized stock from a 6% year-on-year high as at the first quarter of 2018 to 1.9% by the first quarter of 2019, and the more volatile growth rate in CBD stock from a 9.6% year-on-year high back in the second quarter of 2014 to 0.4% by the first quarter of 2019.
The latter sector has seen some dips into negative territory along the way, FNB would assume to in part imply conversion of some office space to other purposes such as residential.
Containing the growth rate in existing office space at the current time of economic stagnation, and as office-related employment growth battles, is crucial in containing vacancy rates and thus assisting the performance of this property asset class.
And looking to the level of building activity in the office sector, signs of slowdown to come in the near term are evident.
Smoothing this volatile data using a fourth-quarter moving total, FNB sees that at 599,440 square metres for the four-quarters to Q2 2019, the level of office space completed remains relatively strong, only -24% below the multi-year high of 2013. However, square metres of office space plans passed has been dropping more significantly of late, and was -53% below its 2014 multi-year high by the fourth-quarter to Q2 2019. This is pointing toward a noticeable near term decline in the levels of office space completed to come, which would assist in containing the growth in existing office stock.
In an economy with a low level of labour market flexibility, employment trends can be expected to significantly lag economic performance, and as such it is likely that the finance, real estate and business services sector’s employment growth rate will slow further with a 2019 economic growth rate of only 0.3% expected, down from last year’s 0.8%.
The question is does this exert upward pressure on the national office vacancy rate or downward pressure on new office space building levels. FNB would anticipate a bit of both, vacancy rates beginning to rise and new space building completions beginning to decline more noticeably in (lagged) correlation with what FNB has already seen in terms of a significant decline of office space plans passed in recent years.
FNB’s third quarter ‘FNB Property Broker Survey of Major Metro Markets‘ indeed points to rising office vacancy rates. 43.6% of respondents perceived a rise in office vacancy rates over the past six months, 41.8% perceived unchanged vacancy rates over the past six months, while only 14.6% perceived a decline over the same period.
The bias of the respondent brokers is this toward rising office vacancy rates in recent months.