News Research

The commercial property market may be in a weaker state than the overall economy

By John Loos, Property Strategist, FNB Commercial Property Finance

The latest FNB Commercial Property Broker Survey – 2nd Quarter Market Activity points to the continued strength in the industrial market but weakness in the office market with ongoing planning by certain companies to scale back on office space.

FNB surveys a sample of commercial property brokers in and around South Africa’s six major metros who have dealt with owner-serviced properties with a portion who also have dealings in the developer or investor markets as well as in the listed property sector.

In the second quarter of 2021, the percentage of brokers surveyed experiencing conditions as ‘satisfactory’ rose mildly from 26% in the prior quarter to 27%. This improved but it implies that a major 73% of respondents were still dissatisfied with business conditions at the time of May 2021 survey.

Indicating a perspective of business confidence in the commercial property sector, it now appears weaker than broader economy-wide business confidence which, as portrayed by the RMB-BER Business Confidence Index, has seen a more noticeable rebound to 50 on a scale of 0 to 100 in 2021’s second quarter, after bottoming at a low 5 during the second quarter of 2020 as the hard lockdowns hit.

FNB says the commercial property market tends to track the overall economy to a significant degree and its recovery would be expected to lag that of the overall economy. When businesses have taken such a major financial knock as that of 2020’s deep recession, finances and confidence are low and leasing additional space or investing in additional commercial property would, for many, be on the backburner for some time until confidence improves.  

By examining economic data, times are still tough for business with real year-on-year (y/y) percentage change in Gross Domestic Product (GDP) still down -3.2% as of 2021’s first quarter. In addition, there is a growing belief that the next move in interest rates will be up in 2022 which may be encouraging some caution by investors looking ahead.

Activity rating by major property class – office property perceived as the weakest

When looking at the three major commercial property classes, the weak confidence levels are likely driven most by the office market, to a lesser extent by the retail property market, and least by the industrial market.

The group of brokers are most optimistic about the industrial and warehouse property market with its 2021 Q2 activity rising slightly from 5.44 in the previous quarter to 5.47.

This was the fourth consecutive quarter of increase in this activity rating and its level is near to the 5.52 pre-lockdown rating recorded in 2020’s first quarter survey.

By comparison, retail property activity was lower at 4.38 during the second quarter. However, it too recorded its fourth consecutive quarter of increase from 4.18 in the previous quarter.

The office property market’s activity rating remained the weakest. It did rise mildly for the third successive quarter from 3.39 in 2021’s first quarter to 3.63 during the second quarter.

None of the three major commercial property classes have seen their activity ratings return to pre-lockdown levels recorded during 2020’s first quarter yet, although industrial property’s most recent rating is coming close.

This situation remains in line with an economy whose level of output, as measured by real GDP, is also not back up to pre-lockdown levels.

The warehousing part of industrial sees its performance and demand driven to a significant extent by inventory requirements. With 2019 and 2020 seeing a sharp and sustained drop in real economy-wide inventory levels, the economic fundamentals underpinning demand for warehouse space are not strong. However, it is more the medium to long-term inventory level requirements that are key to warehousing demand and FNB predicts some recovery in inventory levels in 2021/2022 as GPD ‘normalizes’.

In 2021’s first quarter, manufacturing Gross Value Added (GVA) y/y growth was still negative at -1.15% and this sector’s GVA is a key influence on demand for industrial property space and tenant performance. Real retail and wholesale trade, catering, and accommodation GVA growth was negative at -3.76% and this in turn is a key influence on the retail and hospitality property sectors.

The GVA of the Finance, Real Estate and Business Services (FREBS) sector was also in negative growth territory of around -5.3% in 2021’s first quarter with this sector being a key influence on office property performance.

However, while the GVA of the latter sector influences tenant performance in the office sector, it is more the employment trends in the FREBS sector that influences the demand for office space. By the final quarter of 2020, the FREBS sector’s employment numbers dropped sharply by 7.58% y/y.

In short, all key economic variables that FNB sees as strong influences on demand for the three commercial property sectors, space remained weak and below pre-lockdown levels in early 2021.

The brokers perceive activity levels in all three property markets not yet having recovered to pre-lockdown levels which appears in line with the key relevant economic indicators. Industrial market activity is perceived to have strengthened the most in recent quarters.  

FNB selects a different sample of brokers from the industrial property market for each quarterly survey. While asking for quarterly activity ratings, FNB asks a follow up question as to whether the brokers perceive strengthened activity level of the six months leading up to the date of the survey.

During 2021’s second quarter survey, the market with the highest index reading, by a significant margin, was the industrial and warehouse property market with an improved reading from the prior quarter’s +27 to +28.

This implies that brokers perceive a strengthening in activity in this sector over the prior six months exceeding those that perceived weakening by +28 percentage points. The office property market reading was a far weaker negative of -11, implying that the percentage of respondents who perceived a decrease in activity in this sector exceeded those perceiving an increase by 11 percentage points.

The retail market returned a less weak reading than that of the office market, but it was still significantly weaker than industrial at a small positive of +4.

In terms of buyer-seller market activity, the brokers continue to see the industrial property market as the strongest of the three major segments, as well as the one with the strongest improvement over the prior six months.

Outlook: near-term expectations of market activity strengthening have become less pronounced in the most recent survey

FNB compiles an index by asking brokers for their expectations of the direction of market activity in the six months ahead.

As a group, the brokers are most optimistic about industrial market activity in the near term with this sector’s index recording a positive reading of approximately +17. However, this represents a weaker aggregate expectation compared to the +26 reading of the previous quarter.

The brokers remain least optimistic about the office property market which recorded a negative -2 with the retail market recording a mild positive of +4 – also representing a weaker aggregate expectation than the +10 reading of the prior quarter.

Key drivers of brokers’ expectations: Covid-19 economic impact still seen as the biggest influence over the three sectors

In all three property classes’ survey responses, the various Covid-19-related impacts remained by far the most dominant factor cited as an influence on broker thinking and on their expectations.

The office market

In 2021’s second quarter survey, the office property component showed 74.6% of brokers citing factors related to the effect of Covid-19 as a key factor driving their activity expectations. A significant 58.73% of brokers perceive companies to be re-evaluating their office space needs, and in many instances downscaling on office space – a key factor influencing their near-term expectations of market activity in this segment.

The ‘Work From Home (WFH)’ surge during and following lockdown features prominently in these space requirements revisions. However, it is more than just about WFH, with 12.7% of brokers mentioning investors “waiting to see what the Covid-19 impact is on the economy”, 11.11% saying “the market is dead”, and 7.94% pointing to “Economic Fallout/Businesses focused on saving themselves”.

A further noticeable factor category cited was that of cautious ‘buyer mindset’ which includes rather leasing than owning a risky asset, going for more affordable lower grade properties, and a ‘wait and see’ approach by some.

20.63% also point to ‘stock issues’ with the bias significantly towards an oversupply of stock on the market.

The industrial and warehouse market

In the industrial and warehouse property market survey component, the effect of Covid-19 was also the major factor category, with 40% of brokers pointing to the economic fallout from Covid-19 lockdowns as being a key issue in influencing their near-term market activity expectations.

Within this general category of response, 28.33% cited the economic fallout from Covid-19, while 8.33% referred to an investor ‘wait and see the impact of Covid-19’ attitude and 5% said the market was ‘dead’. However, 8.33% expect ‘confidence to increase as we come out of Covid-19’, while 5% believed that less imports were positive for local manufacturing.

And under the major category of factors called ‘Changing Market Conditions’, cited by 31.67% of brokers, 13.33% see smaller businesses entering the industrial market, and investors or buyers still finding good value here. In tough economic times, the relative affordability of the industrial market would surely have appeal for a group of businesses. 13.33% believed that increased online retail was driving demand for additional warehousing space, while there was also talk of some companies converting warehouse space to office space or customizing it for other purposes.

28.33% of brokers pointed to ‘stock issues’ with about 20% implying stock shortages.

Retail market

The brokers still see the Covid-19 impact, and the recessionary impact of the lockdowns, as by far the main issue that retail property faces.

51.92% of brokers see Covid-19’s impact as key, and within that major response category 23.08% of brokers see the economic fallout of the pandemic as a key factor influencing their expectations. 13.46% see the market as ‘dead’, and 7.69% perceive a widespread ‘wait and see’ approach as slowing activity.

In addition, in another category of factors, i.e., ‘Economic and Political Uncertainty’, 13.46% of brokers cite either a weak economy or sharply rising municipal rates and utilities tariffs as a key issue.

The brokers still see general economic performance and its impact on consumer purchasing power as the key issue for retailers and their landlords.

However, the challenge of online retail to retail shopping centres reflects in the survey again as a ‘minor partner’, with 11.56% of brokers citing online retail as contributing to declining footfall, under the major category of ‘Difficult Trading Conditions’.


The Q2 2021 FNB Property Broker Survey showed perceptions of further market activity strengthening in all three major commercial property classes, continuing to point to industrial being the stronger of all three from an activity point of view. Retail in the middle with office the weakest.

However, while the perception is one of strengthening in all three sectors in the recent past, expectations of strengthening in activity soon (the next six months) have moderated. The aggregated expectation of brokers of further strengthening remains most pronounced in the industrial sector, but here as well as in the retail property sector the strengthening expectation has weakened, while in the office survey the aggregated bias is still slightly in favour of declining near term activity.

In all three property classes, the brokers still see significant negatives in terms of the economic and market impact emanating from the Covid-19 pandemic disruptions and the resultant 2020 recession.

In the office market, the brokers continue to perceive a major structural change in the form of greater work from home levels compared to pre-pandemic levels, continuing, and a significant level of planning to downscale on office space requirements by companies. This is key to the brokers surveyed remaining the least optimistic on the office market’s strength and activity levels.

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