Work from home headache for offices in South Africa

Data from the latest FNB Property Broker Survey shows that work-from-home trends in South Africa are changing value perceptions within the commercial property market.

The aggregated response from brokers who took part in the survey for the second quarter continued to point to declining vacancy rates in all 3 commercial property classes, i.e., office, industrial and retail property, FNB said.

This turnaround reflected the normalization in economic activity following the harsh Covid-19 lockdowns, resulting in greater rates of new business formation and perhaps expansion, said John Loos, property sector strategist at FNB Commercial Property Finance.

More recently, however, as inflation and interest rates rise and the economy comes under renewed pressure, the question is how long can this declining trend in vacancies last?

And while this is some mildly good news for office landlords many of whom have seen a sharp rise in vacancy rates in recent years.

Worryingly in the office sector, a prior survey conducted by FNB showed that 14.63% of brokers pointed towards “growth in the small business segment”. However, that has receded to an almost insignificant 2.5% in the second quarter 2022 survey.

Loos said that improving vacancy rates, albeit at a low rate, is not insignificant and should be welcomed news for landlords.

What may be leading to some potential decline in the high office vacancy rates?

Loos said that it is possible that the stock available is declining. “The new development of office space is weak, and a portion of existing stock is being converted into residential space, so we may have experienced some decline in the total available office space in the office rental market of late.”

Secondly, at some point more realistic office rentals should curb the declining demand for office space, he said. Office rentals have been getting more realistic over time, and this can help to stabilize demand for space at some new lower equilibrium level,” the strategist said.

Thirdly, the sharp 2020 decline in employment numbers in the Finance, Real Estate and Business Services Sector (FREBS) has ended, and revised data for recent quarters from StatsSA have shown some low positive growth, he said.

“However, this growth has been fading, the first quarter year-on-year rate slowing to just +0.4%, from a post-lockdown high of +2.36%, so this driver of office space demand appears limited.”

Loos said that big questions still surround the potential downscaling in office requirements by many companies.

“We know that greater levels of work from home (WFH) compared to pre-lockdown days, along with improved use of desk space through the hoteling of space – away from the old way of reserving a desk for everyone regardless of whether they are using it or not-  has been leading to a reduction of office space requirements for many. This may have significantly influenced the rising vacancy trend of recent years.”

And as to when this process could end or slow down, Loos said that this is a key unknown.

“So, while pointing to a possible onset of a declining trend in vacancies recently, respondents still expect a considerable downward revision of many companies’ space needs.”

“We would actually be cautious about concluding that we have reached a sustainable declining vacancy trend in any of the 3 sectors yet, given renewed economic pressures mounting,” said Loos.

After a significant recovery in economic growth off a very low 2020 recession base, renewed pressure comes from a significant rise in inflation (CPI inflation most recently at 7.4% as at June), and cumulative SARB interest rate hiking of 200 basis points to date since late-2021.

In addition, the global economy is also showing signs of pressure from high energy prices and inflation in general, and resultant widespread interest rate hiking, and this can also dampen the domestic economy and business confidence, said FNB.

“Therefore, we would anticipate that at least in the Office and Retail Property Sectors, the declining vacancy trend may fizzle out in the near term, retailers coming under renewed pressure from consumers financially pressured by high inflation and rising interest rates.”

According to Discovery Insure’s Work From Home Index, people physically travel between work and home three days a week. That means most workers typically work from home two days a week.

“Although we’re seeing a transition back to the office for most organisations, people are still spending a significant number of hours working from home,” said Theresa Relihan, head of marketing, sub-Sahara Africa for Logitech.

Read: One of South Africa’s biggest banks says the shift to flexible working is paying off

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