Late 2019’s national office vacancy rate up slightly

Key findings:

  • As at the fourth quarter of 2019, the national office vacancy rate as recorded by SAPOA was 11% – marginally up on the quarter before while asking rentals grew by 2.5% compared to the same quarter a year before.
  • Since 2011, South Africa’s office vacancy rate has been trending sideways notwithstanding a couple of bounces, up and down, in between.
  • However, given the amount of stock that has been constructed in this period, available office gross lettable areas increase dramatically in square meter terms.
  • Muted employment and economic growth continue to dampen the office property sector’s hopes of a clear-cut short to medium term recovery.
  • Gross fixed capital formation by the business and the financial services sector – a key leading indicator for office occupancy has steadily been improving since 2017.
  • This suggests an improving probability of stabilization in the short to medium term as occupiers start allocating capital to expansion instead of adopting a wait-and-see approach. This allows demand to catch up to supply thus improving the vacancy rate and by consequence, asking rental growth and investment returns.
  • The quarter ending December 2019 saw vacancy rates soften in the Prime and B-grade segments but improve in the A and C-grade segments.
  • The C-grade office segment saw the largest improvement in vacancy rates of 140bp (mainly as a result of residential conversions) while the A-grade vacancy rate improved by 20bps.
  • The vacancy rate of the prime office segment is at an all time high of 10.6%.
  • Among the country’s five largest metropolitan municipalities, the City of Cape Town still has the lowest overall vacancy rate at 7.3% following another slight improvement in the latest quarter.
  • Development activity in the office sector has slowed to its lowest level since the first quarter of 2006. Activity has essentially halved in the last eighteen months as several concurrent developments have come to market.
  • At the end of the current quarter, developments under construction totaled 247k square meters.
  • As at the fourth quarter of 2019, the office sector’s drawn out recovery continues with an increasing amount of office square metreage dripping onto the market. Given the quantum of office supply relative to the low demand, it is debatable whether the sector can still be seen to be in recovery.
  • Given economic headwinds and structural growth constraints such as electricity supply, it is becoming increasingly difficult to imagine the national office vacancy rate returning to mid-single digits within the next three years. Historically, real GDP growth of 3.5%+ was the minimum requirement needed to drive employment growth and subsequently, the demand for office space. Current GDP forecasts suggests that a national office vacancy rate of around 10% might be the ‘new normal’ for the foreseeable future with all things considered.

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