Commercial rental property market remains challenging

The recent news that the “National State of Disaster” finally came to an end in early April 2022, after a 750-day period is encouraging news for the commercial rental sector according to the Seeff Property Group.

The commercial rental market suffered severely due to the hard lockdowns and decline in business, retail and industrial activities and was further impacted by transport and logistical challenges among many others.

For many, business came to an abrupt halt when the country went into the initial Covid-19 Lockdown and for others, their business was severely impacted and generally, the economy continued to face significant challenges for a variety of reasons throughout 2021.

According to the Q1:2022 FNB Property Broker Survey, all three classes of commercial property - namely office, industrial and retail – continue to face challenges although there appears to be some indication that the sector may start bouncing back.

The 2021 financial year already showed strong signs of economic recovery from the decline to recessionary conditions during the 2020 lockdown year. Indications are that 2022 should show further economic recovery which is good news for the commercial rental market.

Commercial property vacancy rates remain high
According to data from MSCI, the “all vacancy” rate stood at around 6% in 2019 and deteriorated to 9.7% by 2021. This is worse than the previous high of 6.7% in 2011 and well above the low of 4.3% in late 2015.

The “Retail Property” category appears to be the least affected. The vacancy rate stood at 5% in 2019 and deteriorated to 6% by 2021. This is similar to the 6%-high of 2011 and well above the low of 3% in 2016.

The vacancy rate for “Industrial Property” stood at about 3% in 2019 and deteriorated to 7.7% by 2021. This is somewhat better than the 5% vacancy rate of 2010 and slightly below the 2% rate of 2013/4.

The “Office Property” category appears to be the worst affected. The vacancy rate declined further from around 10% in 2019 to 17.9% in 2021, but FNB says it probably reached close to 20% by the end of 2021. This is worse than the previous highest rate of almost 14% in 2012 and well above the lowest rate of 7.9% in 2015.

While some growth in demand for commercial space may be coming from significant growth prospects for small businesses underway, the demand for office space seems to have been particularly impacted by the drastic decline in employment in key service sectors such as finance, property and general business services.

The WFH (Work from Home) trend has also contributed to the decline in demand for office space. On the upside, some surplus stock appears to be suitable for conversion to housing units which in turn would meet the need for more residential accommodation in certain areas such as inner city spaces.

Decline in commercial tenants in good standing
The TPN Credit Bureau Commercial Rental Monitor for Q3:2021 shows that the recovery of rental payments by commercial tenants appears to have stalled with tenants in good standing declining slightly.

By mid-2020 only about 50.35% of commercial tenants were in good standing, but this improved to about 66.69% in Q3:2021. This is, however, still somewhat worse compared to the 77.85% of tenants who were in good standing in Q1:2020, prior to the first Covid-19 Lockdown.

It is also still well down on the high of 83.56% of 2012. Retail tenants appear to be the most severely impacted by the lockdowns.