Slight uptick in retail, industrial rental market
But brokers strongly believe that vacancy rates will rise across all commercial sectors
THE FIRST National Bank ( FNB) third- quarter Property Broker Survey of commercial property rental market conditions showed there had been a slight recovery in industrial and retail market activity, but levels were still well below pre- lockdown levels, according to FNB Commercial Property Finance property strategist John Loos.
The rental market component of the FNB Commercial Property Broker Survey examines a sample of commercial property brokers in and around the six major metros who deal mainly in owner- service properties.
In line with surveys for the buying and selling component of the commercial property market, the highest level of optimism in the rental component came from the industrial and warehouse property market respondents.
In this segment, the activity rating rose from 4.5 points in the ‘‘ lockdown’’ second quarter, to 5.19 points in the third- quarter survey. The retail sector also saw some strengthening: its rating improved to 4.1 points from 3.62 points in the second quarter.
However, the office sector’s rental activity rating continued a decline to 3.66 points, slightly down from 3.7 points of the prior quarter, and now has the lowest rating of the three major commercial property sectors.
Despite slight industrial and retail improvements, all three sectors’ levels remained well below pre- lockdown first- quarter activity levels, said Loos.
Of the three property classes, the industrial property survey returned the least negative reading of - 8, implying that 8 percentage point more respondents perceived a decline in rental market activity than those who perceived an increase. The readings in the retail and office markets for this response were far weaker: office with - 70 points and retail with - 53 points.
“The retail and office sectors’ readings remain far below the first quarter, which was prior to lockdown, and at a very similar level to the weak readings of the second quarter,” said Loos.
The aggregate perception among the brokers of rising vacancy rates was “very strong” across all three sectors.
Loos said the strong perception of rising vacancies over the past two quarters’ surveys was in line with what TPN reported regarding tenant payment performance, which fell sharply in the second quarter to 50.36 percent, from 77.85 percent of tenants being in good standing in the first quarter.
He said that, from an economy point of view, strong perceptions of rising vacancy rates suggested that a complete economic recovery ( to pre-Covid- 19 production levels) would be tough to achieve in the short term, because the economy- wide production capacity had likely been reduced.
The office property sector had the added challenge of an increase in remote working.
In the industrial property survey, where brokers were most confident about near- term market activity, only 17 percent of respondents pointed to the negative economic impact of Covid- 19 as being a key factor influencing their expectations.
A more significant 28 percent pointed to expected small business demand for space, the relative affordability of industrial property being seen as its advantage over the other property sectors, while 9 percent pointed to the increased need for warehouse space as online retail grew.
In the retail property survey, where respondents were most pessimistic about near- term activity levels in the rental market, 37 percent cited the economic impact of Covid- 19 as a key issue, while 13 percent pointed to the online challenge to retail property.
“In our forecast for all commercial property values, we have projected - 7 percent average value decline for 2020, and … we have kept this projection for the year unchanged,” said Loos.