Back to the office, but commercial property woes remain

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It’s that time of the year. Workers around the country are reaching into the back of their cupboards to dig out their corporate wear in preparation for their return to the office.

But the realities of office work look far different from how they did three years ago, before Covid-19 changed the way many do their jobs. The pandemic hit the commercial property sector like a tonne of bricks and many questioned whether it would ever recover.

In 2023, the sector will continue to struggle amid tough economic conditions and, as work-from-home arrangements look to stick around in some form or another, there is little chance offices will ever be as full as they were in 2019.

Estienne de Klerk, the chief executive of Growthpoint Properties Limited South Africa, said the commercial property sector’s recovery from Covid-19’s blow has been constrained by enduring economic conditions.

“We are in a very, very difficult economic environment. We have seen the economy recover a little bit … You’ve got a tough economy. You’ve got increases in interest rates and inflation in expenses,” he said.

That said, the return of tourism has been a boon for parts of Growthpoint’s property portfolio, which includes the V&A Waterfront. De Klerk said inflation also stands to push up rental prices. 

He noted that the industrial property sector has recorded the greatest recovery over the past year, followed by retail, where landlords have generally been on the backfoot as a result of a weaker economy and lower demand for rental space.

“We have seen vacancies reduce materially in industrial property and in retail we have seen the market strengthen significantly in terms of the fundamental trade,” he said.

According to Growthpoint’s results for the year ended 30 June 2022, industrial vacancies fell to 5.7% compared with 9.4% previously. Retail vacancies also dropped to 5.5% from 6.2%. Trading density in retail grew by 8.6%, up markedly from the 1.9% in the 2021 financial year). This growth was driven by the recovery in regional centres.

But offices recorded a slightly higher level of vacancies at 20.7%, up from 19.9%. Growthpoint’s results presentation notes that tenants are returning to their offices, albeit in a hybrid, flexible format. The results presentation also noted that, although office vacancies are still high, they appear to be levelling off, having reduced since their peak of 22.4% on 31 March 2022.

The office sector’s recovery has been uneven across regions, De Klerk pointed out, with Cape Town and Durban performing better but Gauteng, specifically Johannesburg’s Sandton area, is struggling the most. Sandton represents 21.6% of Growthpoint’s office property portfolio (measured by gross leasable area) and had vacancies of 26%.

Remote working is a big reason for the office sector’s woes. But, according to Growthpoint, this working arrangement is not proving to be sustainable in the long term, partly because of load-shedding.

“We have seen corporates come back to us in December and say, ‘Look, we actually need a bit more space’,” De Klerk said. “If you don’t have power at home, it doesn’t actually make sense to run your generator just to keep your wi-fi up.

“So what we are seeing is that at the bigger corporates staff are required to come back to their offices and that is supporting some of the improvement in those statistics.”

Ultimately, however, the property industry’s close correlation to the movements in South Africa’s economy means that it will probably remain constrained until conditions improve. “If the South African economy and the corporates within the economy are under pressure, we are going to struggle a little bit,” De Klerk said.

John Loos, senior economist and property strategist at FNB’s commercial property finance division, said whatever recovery commercial property has recovered over the past two years will probably peter out in 2023. This is as the sector feels the lagged effects of higher interest rates and softer economic growth.

According to Loos, prior to the pandemic the sector was in the early stages of a long-term correction in property values. 

He pointed out that economic growth had started stagnating from about 2012 and real property values (inflation adjusted) started to decline in 2015. The first half of 2022 saw a return to positive real growth in capital value. But, Loos said, a weaker economy will probably end this trajectory in 2023, as actual capital growth struggles to keep up with inflation.

He added that the office sector will probably remain an underperformer in 2023, considering the high level of unemployment, as well as continued efforts by companies to keep costs down. 

“The big deal now is more flexible working arrangements,” Loos said, adding that staff will probably resist efforts by employers to impose a total return to the office. Although work-from-home was sped up by the pandemic, offices were already moving in that direction with developments in technology, he noted. 

Loos was also sceptical of the belief that load-shedding would push more people into returning to the office, noting that transport costs would probably outweigh that of having an inverter at home.

“The levels of office attendance that we saw in 2019,” Loos said, “I don’t think we are going to get back to that.”