The coronavirus had a severe impact on the commercial market, with the office and retail sectors particularly hard hit
The commercial property market has been heavily impacted by the coronavirus lockdown, with each sector fighting its own battle against economic conditions and consumer confidence.
The economy may now have opened up more under Level 1 but a lot of damage has been done over the past 12 months.
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Many businesses have closed, downsized, or struggled for survival and this has had a knock-on effect on those who own the properties they operate from. Some properties are even being repurposed in desperate attempts to keep them viable.
So how has each commercial property sector held up in these unprecedented conditions? And what lies in store in the post-Covid world?
• Office property
The office property sector has faced tough challenges. Not only have businesses had the tough task of keeping afloat from a financial perspective but the work-from-home trend has shown that those that are still in business, do not need to operate from a traditional office.
In the last quarter of 2020, the overall office vacancy rate in South Africa was 13.3%, the highest since 2004, states the SA Property Owners Association’s latest Office Vacancy Report.
“The curve steepened dramatically since March as tenants’ financial positions have come under pressure, forcing occupiers to reconsider the extent of their physical offices.”
The fact that the country entered the Covid era with an oversupply of offices only exacerbated the situation, the report states.
The FNB Property Broker Survey for Q4 reveals that 95% of respondents perceive office property supply to exceed demand – the highest of all three property sectors, says the bank’s commercial property economist John Loos.
“The forced remote working ‘experiment’ was successful, and recent quarters’ broker surveys point to many companies re-assessing their office space needs, and many planning to reduce the amount of office space leased or owned.
“This process may well gather momentum in 2021.”
However, says John Jack, chief executive of Galetti Corporate Real Estate, low-interest rates coupled with excess commercial property supply makes for a dynamic investment landscape.
“We are seeing quite significant international interest in the commercial property sector and where the listed market may still be fairly mercurial, long-term lease covenants offer far more certainty provided the underlying tenant is secure.”
While 2020 saw many moving away from business hubs, a new trend is bringing people back to the city as a result of excess office properties being converted to residential developments.
Many offices are also being redesigned to accommodate flexible and co-working spaces. This means that there is probably no looming “death of the office” on the horizon but a repurposing of the workplace into a space that will enable workers to interact, engage, and collaborate face-to-face.
Already many companies are adopting a hybrid approach – working remotely some days and in the office on others. This model is delivering “spectacular benefits” for employees and employers alike, says Joanne Bushell, IWG managing director, South Africa.
• Industrial property
This sector has been the star performer of all commercial property over the past few years and even in a world still impacted by Covid and the lockdowns, industrial property remains a hot commodity, Jack says.
“We’ve seen a demand for industrial real estate since mid-last year and this is set to continue. It’s largely driven by the need for on-site manufacturing and a rise in e-commerce.”
Loos says the FNB broker survey showed this market is still perceived to be the strongest, with the market strength lying in the three coastal metros of eThekwini, Nelson Mandela Bay, and Cape Town. Some positive elements even emerged through the lockdown, such as the fact industrial property is the most affordable of the three major property classes.
Loos adds that 24% of survey respondents believe it to be appealing to smaller businesses. Investors also still find value in this property class.
“Eight percent of respondents see positives from online retail, perceiving more warehouse space to be required as a result.”
Tony Bales of Epping Property says the economic conditions will remain tough this year, even for industrial property, but agrees that it will fare better than the retail, office, and leisure sectors. But companies utilising industrial property will continue to push for enhanced efficiencies, while modernisation across all business processes will continue.
“This includes further mechanisation of processes, where possible, as well as far greater utilisation of computerisation and cloud-based solutions. In addition access to buildings with fibre/ 5G will be critical.”
The ratio of offices to warehouses and factories will continue to decrease and demand for environmentally friendly buildings will increase.
• Retail property
The strict lockdown last year hit the retail property market hardest, and this class lost the most income in the first six months. TPN’s Q3 Commercial Rental Monitor states that the percentage of retail tenants in good standing dropped to a 41% in April, in the middle of the lockdown. By October this figure had increased to 55%.
“We believe that this relative underperformance of retail tenants was partly about the lockdown’s severe impact on sales and thus tenants’ finances, but also in part about retail property rents and operating costs being high relative to that of industrial property,” says managing director Michelle Dickens.
Large shopping centres were under the most pressure, with community centres taking the market share of trading. Food retailers fared best as at December, reveals SAPOA’s Retail Trends Report.
“In the third quarter of 2020 food retailer traded only 0.8% below the levels of Q3 2019. However, the foodservice category was still 28.2% down with lower discretionary spend and the reintroduction of the alcohol ban among the factors weighing in on the sector. Apparel retailers were also still trading 10% below their trading density of Q3 2019.”
Categories that outperformed were electronics, homeware, furniture, and interiors.
However, Loos says the retail property sector is no longer the weakest link and property brokers are slightly more optimistic about the retail market over the next few months. The emergence of online retail is the only “minor issue”.
“The broker respondents still see the Covid-19 impact, and the recessionary impact of the lockdowns as, by far, the main issue that the retail property sector faces… General economic performance and its impact on consumer purchasing power is the key issue for retailers and their landlords.”