Johannesburg - Office development activity remains at a historic high despite double-digit national office vacancies.
The latest office vacancy survey report released by the SA Property Owners’ Association (Sapoa) revealed the national office vacancy rate remained virtually unchanged at 10.5 percent in the fourth quarter from 10.6 percent in the third quarter.
Sapoa said the sideways trend in office vacancies of the past five years remained firmly intact since vacancies rose to 9.8 percent after the 2009 recession.
It said there was a promising 60 basis point improvement in vacancies in the second quarter of last year, the largest quarter-on-quarter decline since 2008, but still not a clear downward trend in vacancies.
More than half of the office nodes reported deteriorating vacancy rates in the fourth quarter compared with the previous quarter, while office development activity had in the third quarter of last year overtaken the highs of 1998 and 2007, it said.
Developments under construction increased to a total of 982 000 square metres in the fourth quarter from 922 000m2 in the previous quarter after several new developments broke ground during the quarter, largely in Highveld Technopark in Centurion, Waterfall in Midrand and Menlyn node in Pretoria.
Sapoa said development activity expressed as a percentage of existing market stock was currently at 5.7 percent, which was below the highs of 2007/08 but high given the absence of growth drivers on a national level. The recent drop in the development pre-let rate to 64 percent in the fourth quarter from 72 percent in the previous quarter was slightly concerning, it said.
“A decline in the pre-let rate could weigh on rental growth given that new developments will compete with completed stock for tenants,” it said.
Sapoa said asking rentals increased year on year by 6.5 percent in the fourth quarter compared with 7.1 percent in the third quarter to continue the trend of above-inflation growth.
It said this growth was more a product of supply-side dynamics than being demand driven because current asking rentals were based on a better quality sample than a year ago.
“The latest uptick in rental growth needs to be put in context though. On an inflation-adjusted basis, office rentals are down 15 percent since the first quarter of 2011, having grown at only half the rate of inflation recorded over this period,” it said.
Recovery mode
Sapoa said the office sector remained in recovery mode with a sustained improvement in the office vacancy rate reliant on a strengthening of macroeconomic drivers, with a further deterioration in the domestic economy likely to weigh on office occupancy rates.
Erwin Rode, the chief executive of property services company Rode & Associates, said office demand was driven by the sentiment of decision-makers and bad sentiment would have an impact in two or three years because it was a long-term decision for businesses to employ additional staff and make provision for extra space.
Rode added that the tertiary sector of the economy, which housed most office workers, had been growing at between 2 percent and 3 percent a year since 2012.
“This explains office developers’ bullishness. Also consider that there is a long gestation period between the decision to build and completion, and therefore between directional changes in the economy and building activity. This is especially true of large building projects in the decentralised central business districts,” he said.
Rode said any downgrade to South Africa’s sovereign credit rating was likely to result in an increase in interest rates.
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