Property Insights: What the “Zoom Boom” has done to the commercial property sector
By John Loos
The FNB Commercial Property Broker Survey surveys a sample of commercial property brokers in and around the 6 major metros of South Africa, namely, City of Joburg and Ekurhuleni (Greater Johannesburg), Tshwane, Ethekwini, City of Cape Town and Nelson Mandela Bay.
Given FNB Commercial Property Finance’s strong focus on the “Owner-Serviced” market, a pre-requisite in selecting broker respondents is that they at least deal in owner-serviced properties, but a portion will also have dealings in the developer or investor markets as well as in the listed sector.
In this report we focus on the part of the survey where we ask respondents to rate their perception of the buying/selling market’s (i.e. not rental market) activity levels on a scale of 1 to 10, 10 being the strongest activity level rating.
The term “activity” is as experienced by a property broker, and can include everything from indications of interest in buying or selling, e.g inquiries or viewings related to potential buying or listing, through to actual transaction levels.
Broker satisfaction with business conditions improves mildly but remains weak
Before we survey activity level perceptions, we ask all respondents to say whether they find business conditions “satisfactory” or not in the form of a simple “yes or no” answer. In the 3rd quarter of 2020, the percentage of respondents experiencing conditions as satisfactory increased from a low of 20% in the 2nd quarter to 31%, implying that a major 69% of respondents were still dissatisfied with business conditions as at the time of the August 2020 survey.
This survey response gives a perspective of business confidence that is not far out of line with broader economy-wide business confidence, it would seem, the 3rd quarter picture being one of “improved but still weak”.
Economy-wide business confidence, as portrayed by the RMB-BER Business Confidence Index, also saw a noticeable increase from 5 (scale 0 to 100) in the 2nd quarter of 2020 to 24 in the 3rd quarter, but the latest reading also remains very weak and reflective of poor confidence levels in a deeply recessionary economy.
With Covid-19 lockdowns all but gone, why would business confidence remain so weak?
After the policy-induced economic shock from the Covid-19 lockdown in the 2nd quarter of 2020, a recovery in confidence levels, of both the business and consumer type, was bound to be slow.
Human beings suffer from various cognitive biases, one being so-called “recency bias”. Recency bias implies that recent events are favoured over ones in the more distant past, including when formulating our future expectations. And in our planning we tend to be backward looking. So, when companies set budgets and targets, the recent past often has a major influence. So, after a shock to many businesses’ sales levels in the 2nd quarter, many have likely scaled back on their near-term future expectations, sales targets and budgets. Such collective scaling back by many players across the economy then to a significant degree becomes a self-fulfilling prophesy.
In addition, though, a portion of the economy’s businesses and consumers have indeed lost jobs and revenues, and a portion of the production capacity of the economy (i.e. businesses) has already shut down permanently. Therefore, even with lockdown almost gone, economy-wide production levels cannot immediately shift back up to pre-Covid-19 levels, as production capacity is now lower than pre-Covid-19 levels, and it will take time for new businesses or existing business capacity expansions to fill that gap.
A further constraining factor is the myriad of structural issues that plague the South African economy, to which we return following lockdown. The troubled electricity supply situation has already re-emerged even prior to the economy being back at full production.
And finally, the lockdowns have impacted on a major part of the global economy, not just on South Africa. The global impact dampens the global economy which in turn dampens the world demand for SA’s exports, be it Mining, Manufacturing, Tourism or other. The global impact is a further dent to local confidence.
Given that the Commercial Property Sector is where much of the economy’s production activity plays out, it should be expected that real estate broker confidence trends and levels would not be too far off economy-wide business confidence, i.e. currently improved but still weak.
Activity Rating by Major Property Class – Office Property now perceived as the weakest
When asking brokers for their ratings of market activity levels on a scale of 1 to 10, we still see that the group of respondents is most upbeat (or least pessimistic perhaps) about the Industrial and Warehouse Property Market. This market’s 3rd quarter activity rating rose slightly, from 4.11 in the previous quarter to 4.64.
By comparison, the Retail Property Activity Rating was noticeably lower at 3.37 in the 3rd quarter, although slightly up from the prior quarter’s 2.87. The Office Property Market Activity Rating, however, continued to decline, from 3.39 in the 2nd quarter to 2.97 in the 3rd quarter, now the weakest rated sector from a buyer-seller market activity point of view.
Office Market Activity was seen as having weakened the most over the past 6 months
We ask a follow up question as to whether the respondents have perceived a decline, increase or no change in activity levels compared with 6 months prior. From these results we compile an index, allocating a score of +1 to each percentage points’ worth of “increased” responses, zero to that of “unchanged” responses and -1 for that of “decreased” responses. The index is thus on a scale of +100 to -100.
In the 3rd quarter survey, the market with the highest index reading was the Industrial and Warehouse Property Market. This sector’s reading had improved from the prior quarter’s negative -53, but was still weak and negative at -20 in the 3rd quarter survey.
This implies that the percentage of respondents perceiving a weakening in activity in this sector exceeds those that perceived strengthening by 20 percentage points.
The Office Property Market reading was a far more severe negative of -69, implying that the percentage of respondents perceiving a decrease in activity in this sector exceeded those perceiving an increase by 69 percentage points. This was only marginally “less weak” than the previous quarter’s -75.
The Retail Market returned a reading in between the Industrial and Office Sectors, improved from the previous quarter’s -82 but still very weak at -50.
In terms of buyer-seller market activity, the group of survey respondents therefore now sees the Office Property Market as the weakest of the 3 major segments, and not the Retail Property Market as was previously the case.
Outlook – Respondents least optimistic about Office Market over next 6 months
We compile an index using the same methodology, but this time asking brokers for their expectations of the direction of market activity in the 6 months ahead (“increase”, “stay the same” or “decrease”).
The respondents as a group are now by a small margin the least optimistic about the Office Property Market, which recorded a slightly positive +3, with the expectations regarding the Retail Property Market only slightly stronger at +6. The Industrial Property Market remains the segment in which the brokers have the most optimism, its reading coming in at +18.
Key drivers of Brokers’ Expectations –Covid-19 economic impact seen as the biggest influence over the 3 sectors.
In an open-ended follow up question to the one regarding expectations of near-term activity direction, we ask brokers to provide reasons as to why they expect the direction that they do.
The near term expectations regarding activity levels were overwhelmingly negative, and “Covid-19” was by far the most dominant reason for the negative expectations recorded.
The previously dominant major category of “Economic and Political Uncertainty” appeared all but forgotten in the most recent 2 surveys. However, this was not entirely the case, as a significant portion of the Covid-19 impact reasoning related to its lockdown-related negative impact on the economy.
Perhaps it just means that brokers had, at least for the time being, perceived Covid-19 lockdown to have far worse implications for the economy than the myriad of structural factors that have constrained economic performance for many years prior to Covid-19.
The Office Market –Remote working prospects challenging Office Property now appear to overshadow the emerging online retail trend that the Retail Property Sector is challenged with.
In the 3rd quarter survey, the Office Property component showed 100% of respondents citing “Effect of Covid-19” as a key factor driving their activity expectations.
Looking at the sub-components of this key factor is perhaps more insightful though. A very significant 50% of brokers see companies re-evaluating their office space needs, and in many instances downscaling on office space, as a key factor influencing their near term expectations of market activity in this segment.
The re-evaluation of office space requirements has now overtaken the weak economy and the economic impact of Covid-19 as the most prominent factor in the Office Property Market, as viewed by our survey respondents.
Nevertheless, a still very significant 41% of respondents cited the “economic fallout” from Covid-19 lockdowns as a key factor influencing their market activity expectations.
Only 5% saw tis year’s aggressive SARB interest rate cuts as having an influence on their expectations. The poor state of the economy and the potential impact of the “Zoom Boom” are thus the key influences.
The Industrial and Warehouse Market
In the Industrial and Warehouse Property Market survey component, the economy was the major factor, with 33% of survey respondents pointing to the economic fallout from Covid-19 lockdowns as being a key issue in influencing their near term market activity expectations.
However, some noticeable positives come through in this survey response too. Industrial Property is the most affordable property category of the 3 major property classes, so it is perhaps not surprising that 23% of brokers still point to small businesses and investors finding value in this property class, while 10% point to its popularity amongst certain retailers moving online, due to its affordability relative to retail space.
The broker surveys thus do bring out industrial property’s relative affordability as being something of a competitive advantage over the other 2 major classes.
The Retail Property Market – its still about the economy
Interestingly, brokers appear to see the emergence of online retail as far less of a current issue to retail relative to how they see the “Zoom Boom” and its remote work implications for the Office Property Market, the latter now appearing to be a far more significant challenge.
Rather, the broker respondents see the economy, and the recessionary impact of the lockdowns, as by far the main issue that the Retail Property Sector faces.
50% of respondents see the economic fallout from the Covid-19 lockdown and resultant recession as a key issue influencing their near term market activity expectations. A further 16% see distressed and financial pressure as a key issue, which is directly linked to the economic pressures. By comparison, only 13% of respondents cite online retail affecting footfall in centres and thus being a key issue.
Therefore, the brokers group still sees “old fashioned” economic performance and its impact on consumer purchasing power as the key issue for retailers and their landlords.
The 3rd quarter FNB Property Broker Survey was undertaken during August, by which stage South Africa had largely passed on from the “hard” Covid-19 lockdowns of the 2nd quarter.
With economic activity having started to “normalize”, i.e. partly recover, it is therefore not surprising to see broker business confidence show a more-or-less similar trend to economy-wide business and consumer confidence, recovering mildly on 2nd quarter levels but nevertheless remaining weak.
The negative economic impacts from the 2nd quarter hard lockdowns could be expected to linger, and indeed in this survey it is the negative economic impact from Covid-19 lockdowns on the property market that comes out most strongly as a key issue in influencing broker near term market activity expectations.
While South Africa’s old economic problems have begun to re-emerge, notably the return of Eskom load shedding in recent weeks, this does not yet come through strongly as a key issue in the broker survey. The economic focus still remains largely on the Covid-19 lockdown-related fallout.
Broker activity expectations for the near term future are not strongly boosted by this year’s aggressive interest cuts.
Brokers on average perceive market activity levels as down on 6 months prior, which would have been just prior to lockdown, but have given a slightly higher activity rating to Industrial and Retail Property compared to the prior survey done in May. The exception was the Activity Rating for Office Property, which declined further on the 2nd quarter one.
The Office Property Sector is now the sector to which brokers now give the weakest activity rating, as well as having the weakest near term activity expectations for. This reflects a relative change, with the respondents in earlier quarters often having been least optimistic about Retail Property. This may have a lot to do with the lockdown-related “Zoom Boom”, and the strong speculation around greater future working from home and companies reducing office space needs.
Prior to lockdown, technology-related talk was largely focused on online retail. During and following the hard lockdown, that appears to have been overshadowed by the “Zoom Boom” and its challenges to the Office Property Sector, or that’s at least what our survey points to.
John Loos is the Property Sector Strategist at FNB Commercial Property Finance