South Africa's office market is in deep trouble due to high vacancy rates, only being exacerbated by the impact of the Covid-19 pandemic.
This is according to the Rode Report 2020 for Quarter 2, which shows that office rentals have seen their weakest year-on-year changes since 2013 at 1% and lower than the 4% seen in the first quarter of 2020.
The report produced by real estate economics firm Rode and Associates indicates that vacancy rates are expected to increase further in 2020 and 2021 as more businesses close, with a prolonged oversupply in the market expected as more companies might look to reduce their space with more employees working from home on a permanent basis.
What is described as the 'Work Form Home Paradigm shift' in the report might only be offset by the need for social distancing to be enforced amongst those employees who are required to work the office.
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Nationally, decentralized vacancy rates for grades A and B offices combined averaged 11,1% in the first quarter of 2020, up from 10,6% in the fourth quarter of 2019. This was the worst vacancy rate since early 2004, says Rode's Kobus Lamprecht.
Based on South African Property Owners Association (SAPOA) data, it shows vacancy rates are moving further away from their 8% long-term average.
"CBD vacancy rates also started to weaken again at the start of 2020, reaching almost 12% on average in the first quarter, largely due to Cape Town’s grade-A+ vacancy rate jumping to 29% as new unlet supply entered the market."
"The Johannesburg decentralized vacancy rate for grades A and B office space combined in the first quarter of 2020 increased to 13% from 12,2% in the fourth quarter of 2019, continuing its weakening trend of the past four years.'
"Vacancy rates in Durban decentralized averaged 8,1% in the first quarter of 2020 a decrease from 8,8% in the fourth quarter as the vacancy rate of Umhlanga/La Lucia improved to about 8%."
"A positive aspect for the market is that international and domestic REITs have reported a high percentage of rental collections in April and May, probably as most companies that were forced to close their offices could work from home and still obtain some form of income. Other companies more severely hit by the virus related lockdown received rental holidays or steep discounts."
Although higher rental collections have been reported, office-focused REITs have struggled on the JSE in 2020 on concerns about long-term
demand prospects and the WFH paradigm created by the Covid-19 Pandemic, says Lamprecht.
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