Poor prognosis for office space

23-07-2015

Nationally, office vacancy rates are finding it hard to drop. And, given the under-performance of important drivers of office demand, a sudden improvement in office vacancy rates should not be expected.

According to Erwin Rode, chief property economist and professional valuer at Rode & Associates, the current weak growth in service-sector employment and low business confidence levels do not auger well for office demand, and consequently vacancy rates.

The tendency for the growth in employment and the growth in the demand for office space to move together over time can be seen in the first graph. Also evident from the graph is that changes in employment explain roughly 80% of the change in the demand – and that services-sector employment and office demand are both shrinking.

Evidence of the impact that low business sentiment levels will have on office demand is shown by the second graph. It displays the strong relationship between business confidence and changes in office demand. Business confidence has since the start of 2011 moved jaggedly sideways – slightly below the neutral index level of 50 – and is now well below 50. An index figure of 50 indicates neutrality, while 100 indicating extreme confidence and 0 extreme lack of confidence.

The explanation for this relationship is of course that business leaders to not hire employees when the future is too uncertain – and then there is no need for extra office space either.

As one of the speakers at the annual Real Estate Investor Conference, Rode will discuss the outlook for office demand and the likely impact that this might have on office vacancy rates and market rentals. The conference is jointly hosted by Rode and Real Estate Investor Magazine, and is sponsored by Wealth Migrate. It will take place in August in Durban, Johannesburg, Bloemfontein, Port Elizabeth, Cape Town and Windhoek.