Office vacancies seemingly leveling off
07-09-2010
After showing the strains of weak economic activity for a number of quarters, office vacancies in both the decentralized and CBD markets are seemingly levelling off.
In the second quarter of 2010, vacancies were, on a national basis, roughly at the same level as the previous quarter. This came on the back of an improvement over the same period in employment in finance, insurance, real estate and business services, as reported by Statistics SA. The graph shows that CBD vacancies have performed ― relative to decentralized offices ― amazingly well since 2009. However, it should be pointed out that this improvement might be illusionary because so many office buildings in the CBDs have been boarded up (i.e. taken out of the ‘space available for letting’ category); or have slipped from grade B into grade C (the latter category is not tracked by Sapoa). These comments do not apply to the Cape Town CBD, of course.
The party pooper during the period under review was the moderation in real gross domestic product (GDP) growth. This came as no surprise, since a number of leading indicators of economic activity ― barring new vehicle sales, which are booming ― have been forewarning us of a cooling in GDP growth. Nonetheless, the second graph tells an interesting story about the relationship between gross value added (GVA)¹ and employment in the finance, insurance, real estate and business services sectors of the economy. Despite the correlation being strong and immediate, the coefficient of determination (r²) shows that about 90% of the change in employment can be explained by changes in gross value added. Furthermore, there is also a lagged effect of up to two quarters later. Note that “opt” in the graph stands for “optimum lag”, in other words the effect of a change in GVA on employment is immediate (zero lag) but there is also a lagged effect of up to two quarters.
¹GVA is an important measure in the estimation of overall GDP. It measures the contribution to the economy of each individual producer, industry or sector in South Africa.
In sum, the latest GDP figures have exposed the shaky and uncertain nature of the economic recovery. Naturally, this might cause companies in the financial-services sector to remain cautious about hiring more employees, which could lead to slower mopping up of vacant office space than would otherwise have been the case. We see this phenomenon in the general economy at work, with relatively strong economic growth but employment that is still contracting.
