ALISHIA SECKAM: Recent figures out of Stats SA show a slowing down in commercial building activity in 2020, but how much of a distinction [is] needed to be made between the various sectors within the cluster – retail, office, industrial space? FNB commercial property finance sector strategist John Loos is joining us now. Thanks so much, John, for joining us this morning.
JOHN LOOS: Morning, Alishia.
ALISHIA SECKAM: Right at the top we had square metreage of total industrial retail and office-space building plans passed of 66.25% year on year in February, and that after roughly a 103% rise and growth spike in January. So quite a rapid turnaround we’ve seen. Why the sudden and sharp U-turn?
JOHN LOOS: Look, I think monthly figures are notoriously volatile in the sector, partly because it’s a small sample size, or small data size, but it can be the way people report or the way Stats SA captures it over a month, or leads and lags in the data. So I don’t pay too much attention; I smooth it out with the 12-month moving average, just to get a bigger trend.
What we have seen there is indeed, for the 12 months to February, a slow down of 11 points, but it’s still growing, an 11% year-on-year growth. But from the 12 months to January it’s down from 38%. So there is a slowdown in growth, but it’s difficult to say just looking at monthly volatile figures that have dropped that much. I think that’s more the reporting.
ALISHIA SECKAM: So we look more big term then: like you say, a slowing down in commercial building activity in 2022. But a survey done by FNB on the retail property space, in particular, is showing signs of improvement, declining vacancy rates. So how do we read this? Is this pointing to strain in the other segments of the sector – office glaringly so – or more broad strokes, John, that recovery in activity and sentiment is not necessarily translating into new build just yet?
JOHN LOOS: Well, it won’t just yet. There’s always a big lag time. I think what one must remember is that all three sectors – office, retail and industrial – had rising vacancy rates for a few years. There was a rising trend even before the lockdown period, which obviously exacerbated it. So the vacancy rates are, let’s put it, elevated, obviously most extreme in the office sector, but also more significantly in retail and industrial.
So, although we are starting to see our broker survey point towards declining vacancy rates, it’ll be some time before those vacancy rates get noticeably lower and fuel the need for additional or new build.
So I think it’s realistic that, for the time being, especially with interest rates rising now, one would probably get building activity going slow for a while.
ALISHIA SECKAM: If we stick with retail for a bit, John, how’s that translating to rental rates? Do you see rental rates getting to a point where they start to at least keep up with inflation, or does this continue coming up against the landlord?
JOHN LOOS: Well, I’m guessing for now, because we don’t have up-to-the-minute data, that would come with improved rentals and accessible escalations, and real market rentals would probably take some time. It wouldn’t happen immediately, as I say, because the tenant population has taken a knock.
Not only are the vacancy rates still elevated, even though they might be starting to come down, but also the tenants are financially fragile.
That you’ve seen in TPN data, where at a stage last year, in the second half of last year, only 64% of existing tenants were in good standing with regard to rentals; they still have to recover. So there’s probably something of a lag time there too before one sees a noticeable increase in rentals in that space.
ALISHIA SECKAM: Of course, John, we’re all too familiar with the shift that’s taken place in a hold-off retail and consumer dynamic. There’s been a significant shift in the workplace dynamic as well. Office plans passed fell 58% year on year in February, off an already very low pace last year. At what point do you see things going back to pre-lockdown levels on that front, if at all?
JOHN LOOS: Well, probably not this year back to pre-lockdown levels, but maybe two, three years from now. I think interest rates would have to peak first as well. So what’s been happening for a long time now [is that] office space has been the underperformer. The work-from-home trend or the greater work-from-home trend and the more efficient use of office space have been building with technological advancements for many, many years now. So the office share of total stock built has been declining for probably two decades or more. Now it’s retail’s turn [to see] the share of stock to also start slowing, because there’s a structural shift towards greater online retail.
So I think the one that can first get back to pre-lockdown levels and be the outperformer in terms of building activity is the industrial and warehouse property, which benefits from sort of increased logistical requirements and so on. The cycle shifts are one thing, but then overall you’ve also got the challenge that we don’t have an economy that’s shooting the lights out in general. So yeah, it’s probably a few years away before we get back to those pre-lockdown building levels.
ALISHIA SECKAM: Let’s leave it there, John. Thanks so much for having joined us bright and early this morning. John Loos is property sector strategist a FNB.