According to the latest FNB Broker Survey for the second quarter of 2022, vacancies across all three commercial property classes, being offices, retail and industrial property, have improved. This appears to be a further improvement on last year’s improved outlook.
Seeff’s commercial property agents have also indicated that the sector has improved notably from the challenges and lows experienced in 2020. The improvement is attributable to the reopening of the economy with production, shopping and back to the office trends as well as some indication of growth in small businesses being some of the driving factors for the improved outlook.
The commercial property sector was understandably particularly hard-hit during the Covid-19 lockdowns. Many businesses closed while others had to scale down drastically. The numbers of businesses that closed down affected the various classes of commercial property.
The best performing property class according to property brokers has been industrial property where the average vacancy rate continues to reduce. This was also a further improvement on last year and the first quarter of this year.
The retail sector appears to be doing even better with most brokers noting during the second quarter of this year that vacancy rates had declined considerably.
The office sector, however, continues to remain the weakest despite vacancy rates improving as people returned to offices in greater numbers. There is some indication that while many employers are returning all employees to the offices full time, others are implementing hybrid systems and reducing their office space needs accordingly.
This trend will result in a reduction in demand for office rentals. It is estimated that the national office vacancy rate is at around 18.2% based on MSCI data provided in 2021. According to FNB there has been a rise in national office vacancies since 2015 when it was at 9.6%.
According to the latest TPN Credit Bureau Commercial Rental Monitor there are still businesses which are struggling to pay their rent. Notably, over 10% of tenants in the commercial property sector did not pay any of their rental expenses during quarter one of 2022.
The weak economic outlook and declining business confidence are cited as potential contributors to the challenges faced by business tenants. The inflation and interest rate hikes could place further pressure on commercial property.
Commercial property outlook improved since 2021, but higher inflation and interest rates could impact
According to FNB, property brokers reported that the improvement in the commercial property market since 2021 includes growth in small businesses as well as some expansion of existing businesses.
In terms of growth going forward, some 24.14% of commercial property brokers expect growth in the small business segment to benefit the retail sector with many seeing a surge in entrepreneurs entering the market. 15.56% also noted small business growth could benefit the industrial sector as well.
Fewer brokers, however, expect that the growth in small businesses will have a considerable impact on the office sector of the market. There is also not much happening in terms of new office developments which may impact stock levels.
More realistic rentals have also been an issue. FNB notes that this has improved and could contribute to stabilising the demand for office space. The trend towards downscaling of office requirements is likely to also continue putting pressure on demand for office rentals.
Ultimately, the economy and business confidence will be big factors in driving economic growth and with that demand for commercial property rentals. While there has been a notable improvement over the 2020 lockdown periods, the commercial property market will remain susceptible to economic influence.
Author: Gina Meintjes, 29 August 2022, Rentals