StatsSA data for Q2 2022 points to a weakening picture for the commercial property development sector in the near term, says John Loos, Property Sector Strategist at FNB Commercial Property Finance.
The square metreage of total industrial, retail and office space building plans passed declined by -25.03% year-on-year in Q2 2022, after a -3.5% decline in Q1.
When viewing the broader trend on a twelve-month basis, there was a -9.8% year-on-year decline for the twelve months to June 2022, following a slight growth rate of +0.23% year-on-year for the twelve months to May 2022, representing a continuation of the broad growth slowdown since the +38.33% for the twelve months to January 2022.
In comparison to more ‘normal’ pre-lockdown times, commercial building planning has never fully recovered.
The post-lockdown levels of plans passed have remained well-below pre-Covid-19 levels. For the twelve months to June 2022, square meterage of plans passed were still -28.7% below the twelve months to June 2019 and -40.1% down on the total passed for the twelve months to June 2018.
Building completions
Building completions recorded a year-on-year decline in Q2 2022 of -12.13% after a +105.08% increase in Q1.
However, on a twelve-month basis, square meterage completed was still up by +16.42% year-on-year for the twelve months to June 2022 but slower than the +21.62% growth for the twelve months to May 2022.
Square meterage completed for the twelve months to June 2022 were still weak by pre-Covid-19 standards i.e., -22.6% down on the twelve months to June 2019 and -26.1% down on the twelve months to June 2018’s levels.
While total square meterage of commercial buildings completed for the twelve months to June 2022 still saw growth, it was slower than the rates for the twelve months to April and May 2022. This, along with declining plans passed, suggests that building completions will slow down during the remainder of 2022.
Office space planning and completions remain the weakest of overall commercial building levels, declining by -50.1% year-on-year in Q2 2022, following a -43.9% decline in Q1. For the twelve months to June 2022, square meterage of office space plans declined year-on-year by -50.14%.
Plans passed for the twelve months to June 2022 remain -69.9% down on the twelve months to June 2019 and -74.2% down on the twelve months to June 2018.
The low level of planned new office space development is in line with the high national office vacancy rate of 18.2% in 2021, according to MSCI.
For the twelve months to June 2022, square metreage of retail space plans passed were -39.67% year-on-year down.
While this is a weak outcome for the twelve-month period, plans passed in this sector had less of a decline in 2020 than office space, -44.3% down on the twelve months to June 2019 than is office space. It was also -69.6% down on the twelve months to June 2018 than the decline during that year in the office sector,
The Q2 2021 FNB-BER Consumer Confidence Index came in at a -25 reading, a sharp weakening from the -13 of the prior quarter, and one of the weakest levels in recorded history.
Added to this, TPN data shows retail tenants as having the weakest rental payment performance of the three major commercial property sectors, with only 62% of tenants being in good standing with their landlords regarding rental payments as at Q1 2022 – this is lower than office’s 63% and industrial’s 68%.
Expansions and new space development in the retail sector are not anticipated on a large scale.
Industrial building activity remains the strongest of the three sectors.
For the twelve months to June 2022, square metreage of industrial space plans passed were +7.08% up year-on-year. However, this does represent a slowing growth rate from 20.27% for the twelve months to May, and +59.4% for the twelve months to January 2022.
New space planning for the twelve months to June 2022 was -14.3% down on the twelve months to June 2019 and -16.2% down on the twelve months to June 2018.
However, some slowdown in the sector’s building activity levels is expected as the sector remains sensitive to the impacts of a global and domestic economic slowdown, and to domestic inflation and interest rate hikes.
In short, the signs are pointing to commercial building activity moving into a period of renewed slowdown.
Smoothed twelve-month average year-on-year growth for total square meterage of commercial building plans passed was negative to the tune of -9.08% for the twelve months to June, and a sharper -25.03% year-on-year drop for Q2 2022 alone.
In addition, MSCI’s All Commercial Property Vacancy Rate remained ‘elevated’ at 8.4% in 2021, significantly above the 5.2% multi-year low reached in 2014. Nationally, commercial space is ample.
