Office vacancies set to remain steady
OFFICE vacancy rates in South Africa increased by 0.2 percent to 10.7 percent in the fourth quarter of last year, compared with the previous quarter. The probability is that they could deteriorate further before improving.
The latest office vacancy report published by the SA Property Owners Association (Sapoa) said the sideways trend observed in the overall office vacancy rates since 2011 remained intact in the fourth quarter of last year since vacancies increased to 9.8 percent after the 2009 recession.
Sapoa said that while there had been a couple of quarters of promising uptake of space, this had often been followed by periods of deterioration that offset the gains. But Sapoa stressed that recent data suggested that the fundamentals underlying the office sector recovery remained fragile, with the latest economic growth and employment data pointing to a stagnant, flat growth environment.
It said the cumulative impact on actual square metres of vacant space had been significant.
“Since 2011, a net total of 475 000m² has been vacated, underlying the lack of growth drivers of office demand which has been outstripped by supply,” it said.
The association said business and financial services capital investment, a leading indicator of the office vacancy rate, slumped by 12.3 percent year on year to September and was “as much as 55 percent off pre-recession levels of 2008”. This raises the probability that office vacancy rates could deteriorate further before improving.
Sapoa said history suggested the recent slump in financial and business capital investment posed a risk to office occupancy rates two to three years down the road and, by consequence, rental growth and returns.
It said the office sector was still firmly entrenched in its recovery phase, but this was becoming increasingly fragile because of the sector’s macro drivers. The vacancy rate of prime offices improved by 0.3 percent to 4 percent in the fourth quarter from the previous quarter, but the A, B and C grade office segments recorded deteriorating occupancy rates.
Despite this negative investment environment, development activity remains high.
Sapoa said developments under construction totalled 717 000m² at the end of the fourth quarter, which was down from the 2015 fourth quarter peak of 982 000m².
But Sapoa said development activity, expressed as a percentage of existing market stock, was currently at 4.1 percent and off the highs of 2007-2008, but still on the high side, given the absence of growth drivers on a national level. It said several large office developments came on to the market during the course of last year, resulting in the total development number reducing slightly.
Sapoa said another reason for the decline was that some developers were scaling down speculative building activity and opting to only phase development on a tenant-driven basis. Development activity continued to be concentrated, with 89 percent of office developments taking place in 10 nodes, with Gauteng office nodes dominating the rankings table.
Sandton continued to account for the bulk of development activity and at the end of the fourth quarter accounted for 48 percent of national office development. The rapidly growing greenfield development nodes of Waterfall and Highveld Technopark, together with the more mature Rosebank node, rounded out the top four with several large scale developments in progress.