OFFICE VACANCY REPORT

• As at Q3 2017, the national office vacancy rate as recorded by SAPOA was 11.2% – down 60bps on the quarter before. Despite the improvement, the current level of 11.2% is still higher than the 11.1% recorded in Q1 in 2017.

• Asking rental growth has slowed further over the past year – indicative of the current low growth environment coupled with an excess supply in the market.

• In square meters terms, an aggregate of 73k sqm was occupied during the past quarter whilst 34k sqm of stock was removed from sample (mainly due to residential conversions) – the result: a net absorption of around 107k sqm.

• Since the first quarter of 2009, only 5 of 34 quarters have seen negative asking rental growth. However, asking rental growth has not kept up with inflation and in real (inflation-adjusted) terms declined by 26% over this period.

• To illustrate the level of excess supply present in the market, consider that there is currently 1.3 million square meters more available to let in the nodes covered by the OVS relative to 2009 underlining the lack of growth drivers of office demand which has seen it outstripped by supply.

• Notwithstanding the 60bp improvement observed in Q3 2017, the office sector recovery remains fragile with the latest economic growth and employment data pointing to a stagnant, flat growth environment.

• Gross fixed capital formation by the business and financial services sector – a key leading indicator for office occupancy – remains negative, raising the probability that office vacancy rates could deteriorate further before improving.

• The quarter ending September 2017, saw vacancy rates improve across all office grades. The largest change was in the C-grade segment with a quarter on quarter improvement of 120bps followed by Prime and B-Grade offices which both declined by 90bps q/q. The national A-Grade office vacancy rate ticked down by 10bps during the quarter.

• Development activity continues to concentrated with 91% of office development taking place in 10 nodes with Gauteng office nodes dominating the rankings table. Sandton continues to account for the bulk of development activity and as at quarter end, constitutes 45% of national office development.

• National office development activity is likely to gradually trend down given that many large scale projects are slated for completion in the next 12 to 18 months and, given that the overall office development pipeline is slowing down compared to recent history.

• In summary, the aggregate vacancy rate has moved broadly sideways between 2011 and 2017 whilst the level of development activity has been trending steadily lower since reaching a peak in 2015Q4. This places the current quarter roughly midway relative to its long-term history in terms of its total vacancy rate and development as a % of existing stock. The ideal short term scenario would be a further, sustained reduction in total vacancy whilst development activity remains at a healthy level.

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