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Working from home headaches for offices in South Africa

Data from the latest FNB Property Broker Survey shows that working from home trends in South Africa are changing value perception within the commercial real estate market.

Aggregated responses from brokers who participated in the survey for the second quarter continued to point to declining vacancy rates in all 3 commercial property classes, namely offices, industrial and retail properties, according to FNB.

This turnaround reflected the normalization of economic activity after the severe Covid-19 lockdowns, resulting in more new business formation and perhaps expansion, said John Loos, real estate strategist at FNB Commercial Property Finance.

More recently, however, with inflation and interest rates rising and the economy coming under renewed pressure, the question is how long can this declining trend in vacancy last?

And while this is somewhat good news for office landlords, many of whom have seen vacancy rates rise sharply in recent years.

Worryingly in the office sector, a previous FNB survey found that 14.63% of brokers pointed to “growth in the small business segment”. However, that has dropped to an almost insignificant 2.5% in the second quarter 2022 survey.

Loos said improving vacancy rates, albeit at a slow pace, is not unimportant and should be good news for landlords.

What can lead to a possible decrease in the high vacancy rate of offices?

Loos indicates that it is possible that the available stock will decrease. “New office space development is weak and some of the existing stock is being converted to residential space, so we may have experienced some decline in total office space available in the office rental market lately.”

Second, at some point, more realistic office rents should curb falling demand for office space, he said. Office rents have become more realistic over time and this may help stabilize demand for space at a new, lower equilibrium level,” said the strategist.

Third, the sharp decline in employment in the financial, real estate and business services (FREBS) sectors in 2020 has come to an end.

“However, this growth is slowing down, Q1 annualized to just +0.4%, from a post-lockdown high of +2.36%, so this driver of office space demand appears to be limited.”

Loos said there are still big questions about the possible scaling of office supplies at many companies.

“We know that more work-from-home (WFH) compared to pre-lockdown days, along with improved desk space utilization through the hoteling of space – moving away from the old way of reserving a desk for everyone, regardless of whether they or not- has led to a reduction in the need for office space for many. This may have strongly influenced the rising vacancy trend of recent years.”

And on when this process could end or slow down, Loos said it’s an unknown key.

“So while respondents point to a possible beginning of a downward trend in job openings, respondents still expect a significant downward revision of the space needs of many companies.”

“We would actually be cautious to conclude that we have achieved a sustained downward vacancy trend in any of the 3 sectors so far, given the renewed economic pressures,” said Loos.

Following a significant recovery in economic growth from a very low recession base in 2020, there is renewed pressure from a significant rise in inflation (CPI inflation most recently 7.4% as of June), and cumulative SARB rate hikes of 200 basis points to so far since the end of 2021.

In addition, the global economy is also showing signs of pressure from high energy prices and inflation in general, and the resulting widespread interest rate hikes, which could also dampen the domestic economy and business confidence, FNB said.

“Therefore, we expect that, at least in the office and retail real estate sectors, the declining vacancy trend could subside in the near term, putting retailers under renewed pressure from consumers who are financially strained 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 employees typically work from home two days a week.

“While we are seeing a transition to the office for most organizations, people are still spending a significant number of hours at home,” said Theresa Relihan, head of marketing, sub-Saharan Africa for Logitech.

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




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