An interesting result from the most recent 4th quarter 2021 FNB Property Broker Survey was that the rising vacancy rate trend in the Office Property Sector is perceived to have more-or-less stalled.

Obviously one quarter doesn’t signal a trend change just yet, but should this be the case nationally then it would be good news for the beleaguered Office Property Sector, whose national average vacancy rate has skyrocketed in recent years.

We ask respondents the question as to whether they believe vacancy rates have increased, declined or remained the same over 6 months prior?

Out of the responses we create an index by allocating a +1 score to an “increased” response, a zero to an “unchanged” response and a negative -1 to a “declined” response.

The scale of the “Index for direction of change in average vacancy rates over the past 6 months” is thus from +100 to -100. A score of +100 would imply that 100% of respondents perceived an increase in vacancy rates over the past 6 months and -100 would imply 100% of respondents perceiving a decline, while a zero level would mean that those providing an “increased” response equals those responding with a “declined” response.

The relatively strong Industrial Property Market’s average vacancy rate is perceived to be on a declining vacancy trend, and its survey response points to a broker group showing increasing conviction as to the strength of this trend.

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The Industrial Sector’s Index for Direction of Change In Vacancy Rate returned a negative value of -63.8, implying that 63.8 percentage points more respondents pointed to a declining vacancy rate compared with those pointing to an increase.

This reading was stronger than the prior quarter’s -37.5, and has been in negative (declining vacancy) territory for 4 consecutive quarters.

The Retail Property Sector’s Index level has been hovering not far from zero for the past 5 quarters, with the past 2 quarterly readings dipping slightly into declining territory to the tune of -12.5 as at the 4th quarter of 2021. This implies that 12.5 percentage points worth more of respondents perceived a declining vacancy rate over the prior 6 months relative to those perceiving an increase.

The pleasant surprise, however, was the Office Sector’s reading which showed an insignificant positive reading of +2.4, indicating that the respondent group perceived virtually no change in average office vacancy rate, after a strong positive reading of +40.54 in the prior quarter.

Should this perception be accurate, and should it hold in future, this could be some mildly good news for office landlords many of whom have seen a sharp rise in vacancy rates in recent years.

By the 1st half of 2021, MSCI bi-annual data already pointed to a 17.9% national office vacancy rate, and that may have edged nearer to 20% in the 2nd half of last year.

While an end to the rising trend would be some good news, it wouldn’t likely stop pressure on rentals and income just yet, because the average vacancy rate would still be high. A sustained declining trend in this vacancy rate would first be required to ease the pressure on rentals.

What may be starting to stabilize office vacancies?

So what may be leading to some stabilization in the high office vacancy rates?

Well firstly, at some point more realistic office rentals should curb the declining demand for office space, and by the 3rd quarter of 2021 Rode national A-Grade office rental data was showing a -5.5% year-on-year decline, which was -11.99% decline when adjusted to “real” terms (using GDP inflation).

Rentals are thus getting more realistic over time.

Secondly, the sharp decline in employment numbers in the Finance, Real Estate and Business Services Sector (FREBS) has more-or-less ended, data for recent quarters edging back to near to zero year-on-year growth. This comes after sharp drops in employment in late-2020/early-2021.

But there is the question of when much of the downscaling in office requirements by many companies will be complete. We know that greater levels of work from home (WFH), and improved use of desk space through the hoteling of space (away from the old way of reserving a desk for everyone regardless of whether they are using it or not) has been leading to a reduction of office space requirements for many. This has influenced the rising vacancy trend of recent years.

But when does this process end, or at least slow down? Still 39.02% of brokers point to tenant companies revising their office space needs largely lower.

So, while pointing to a more stable vacancy picture of late, respondents still expect considerable downward revision of space needs. We would thus be cautious to conclude that we have reached the end of the rising office vacancy trend just yet, but there are some signs, such as a stabilization in employment and increasingly realistic rentals, that may increase the chances of this.

Source: FNB Property Broker

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