Seeff reports on the current state of the commercial property market amid declining vacancy rates
Good news! According to FNB’s recent Broker Survey, the second quarter of 2022 saw vacancies filled across the commercial property market - this is apparent for all commercial property classes: industrial, retail and office. The industrial property market remains the best performer, followed by retail and then office.
Seeff reports that this is a notable improvement since 2020, which saw the commercial property market suffering under COVID-19’s strict lockdown procedures, resulting in many businesses' forced closure.
What Is Driving the Recovery in the Commercial Property Market?
We can attribute the commercial property market’s gradual recovery to the reopening of the economy. As small businesses show signs of growth, employees head back to the office, and shopping malls fill with eager shoppers once again, it’s no surprise that the commercial property market’s benefitting.
It might surprise you that small businesses have a crucial role in driving economic growth and, thus, property market recovery. Cover reports that the SMME (small, medium, and micro enterprises) sector employs around 80% of the African continent’s workforce, while Stats SA revealed that small businesses contributed approximately 22% of all turnover in South Africa in 2019. This data is evidence of the critical role small businesses have to play in our economy. If they are thriving, our economy has a better chance of succeeding. And that benefits all property sectors.
What Is the Current State of the Office Sector?
According to 2021 data from MSCI, the current national office vacancy rate remains at an estimated 18.2%. We can attribute the office sector’s declining vacancy rates to dwindling stock and few new office developments. A 2022 poll by Business Tech revealed that 51% of respondents predominantly work from home and only come into the office occasionally.
The primary reason for this change in daily procedure is the byproduct of many employees adopting the WFA (work from anywhere) trend of working remotely or implementing a hybrid working model, and as a result, many businesses are downscaling their office requirements.
The decision to downscale significantly impacted the declining vacancy rates, and First National Bank (FNB) suggested that office rentals are a realistic option to stabilise the demand for office space.
Business Tenants Are Struggling to Pay Their Rental Rates
The TPN Credit Bureau Commercial Rental Monitor reports that many companies struggled to pay their rent; this was reflected during the first quarter when approximately 10% of tenants within the commercial property market were unable to pay their rentals. This development likely stems from the weak economic outlook and declining business confidence. For the office sector to recover or regain stability, rental rates must adjust to more realistic figures.
Interestingly, the Western Cape is the best performing province concerning business tenants in good standing. According to Business Tech, 75.54% of Western Cape tenants remain in good standing with their landlords, and KwaZulu-Natal comes in second place with 68.56% of tenants in good standing.
What Can We Expect in the Commercial Property Market’s Future?
Many entrepreneurs are now entering the market, and around 24.14% of commercial property brokers expect small business growth to benefit the retail sector. Another 15.56% also noted that small businesses would continue to place orders for their services and products, and small business growth could significantly benefit the industrial sector overall.
Will this small business growth benefit the office sector? Few property brokers believe this is likely, as there is a considerable uptick in hybrid or remote working.
Ultimately, South Africa’s commercial property market will largely depend on the economy and business confidence. Although 2022 was a better year compared to the difficult lockdown periods of 2020, the commercial property market remains unpredictable and susceptible to economic influence, interest rate hikes, and inflation.
Are you considering an investment in commercial property? Read Seeff’s blog on the different types of real estate to understand the benefits and drawbacks of investing in real estate. If you’re debating whether to invest in residential real estate or commercial, read Seeff’s blog on the differences between residential and commercial property.
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