SAPOA Office Vacancy Report (September 2019)

Key findings:

  • As at Q3 2019, the national office vacancy rate as recorded by SAPOA was 11.0% – a 30bp improvement on the quarter before. The improved vacancy rate did come at the cost of rental growth as asking rental growth nationally declined by 1.0% year-on-year.
  • The latest quarter’s positive figure brings to 10 the number of quarters since September 2008 with positive net absorption. So for every one quarter of positive net absorption there’s been three quarters going the other way. The back fill risk associated with corporate real estate consolidation has been a key driver of this.
  • A net amount of 200k sqm of rentable area was taken up during the latest quarter while a net 148k sqm of stock was added to the sample (new buildings coming on stream less residential conversions etc.)- the result: a positive net absorption of +52k sqm.
  • Since March 2011, the total office vacancy rate (incl. unlet new developments) has not shifted substantially – rather trending sideways with a couple of bounces in between.
  • To get back down to a 5% vacancy rate will require at least 75,000 office-based new jobs –an increase of ~6.7%- no mean feat considering current economic growth forecasts.
  • Muted employment growth and low growth continues to dampen the sector’s hopes of a short term recovery. The current vacancy cycle is very different to the previous two in that the recovery phase is significantly more drawn out.
  • The uncertainty surrounding the country’s credit rating and the future of Eskom is seeing many occupiers adopt a wait-and see approach. While the level of new office development has been trending down since 2015, the demand for space is growing at a slower rate– a situation which is keeping the broad sideways trend in the overall office vacancy rate in tact.
  • The quarter ending September 2019, saw vacancy rates soften in the Prime & C-grade segments but improve in the A & B-grade segments.
  • Development activity in the office sector has been on a downward trend since 2015 amid poor business confidence and low growth. At the end of the current quarter, developments under construction totalled 378k sqm – the lowest level since 2005Q4.
  • The office sector’s drawn out recovery continues with little in the way of macroeconomic tailwinds to suggest a brisk decline in vacancy rates. The longer the recovery draws out, the longer it will take for occupancy rates to get back to ‘equilibrium levels’.
  • Given the headwinds and structural growth constraints faced by the sector it is becoming increasingly hard to imagine the national office vacancy rate returning to mid-single digits within the next 3 years. Historically, real GDP growth of 3.5%+ was the minimum requirement needed to drive employment growth and subsequently the demand for office space. At this stage, GDP forecasts for the next three years are unfortunately not in that range and a national office vacancy rate in the neighbourhood of 10% might be the ‘new normal’ for the foreseeable future, all things considered.

Read the full report here: