The industrial and retail property markets are experiencing an undersupply, while the office market continues to face an oversupply as companies adopt hybrid working arrangements.
According to the FNB property broker survey, the industrial property market remains the strongest, with the retail market closing the gap.
Though the office property market is still the weakest its oversupply has eased in recent years, reflecting a shift in demand dynamics across the commercial sector.
The FNB Commercial Property Finance department focused on the “owner-occupied” property segment, requiring broker respondents to primarily handle owner-occupied properties. However, some brokers also worked in the developer, investor, or listed property markets
“In the industrial market, 62% of respondents believe demand exceeds supply, while 38% see supply outpacing demand, with none perceiving a balanced market. In comparison, 59% of respondents feel demand surpasses supply in the retail property market, while the office property market remains under pressure, with 62% perceiving supply to exceed demand,” reads the survey.
The industrial property market posted the strongest index reading at +56, followed by the retail property market at +32, suggesting that demand is widely seen as exceeding supply in both markets on a national level. In contrast, the office market remained heavily negative at minus 58, indicating a substantial national oversupply.
Much of this improvement in market balances is likely to be attributed to more realistic real property valuations, after a significant decline in real (inflation adjusted) commercial property values since around 2015/16.
— John Loos
FNB property strategist
Regarding the direction of average time on the market over the past six months, the retail index recorded a reading of minus 24 in the fourth quarter, indicating the market strengthening. Similarly, the office property market also showed a negative reading, of minus 26. This suggests a trend towards declining average market conditions.
“The industrial market has performed significantly stronger in recent years, compared with the other two property classes. And despite brokers perceiving a recent decline in its sales activity levels, perhaps it’s a high base explaining a lack of further strengthening in demand,” said FNB property strategist John Loos.
The office market remains notably oversupplied though the imbalance has improved considerably since the postlockdown lows in about 2021. Meanwhile, the industrial property market has consistently seen demand outpacing supply since early 2022.
According to Loos, the demand-supply perception index for the retail property market has only become positive in the past three quarters, marking the first time since the survey began in 2019.
“The broader picture since the easing of Covid-19 lockdowns around 2020/21 has been one of all three markets’ balances broadly strengthening, even in the case of the battling office market. While the demand supply rating for the office market is still very weak at minus 58, this represents a significant improvement from a lowly minus 173 in the second quarter of 2021,” he said.
Loos pointed out that despite sharp interest rate hikes between late 2021 and May 2023 that slowed demand, recent years have seen continued demand-supply improvements. Even with slower demand during this period, it was enough to reduce national oversupplies in industrial and retail sectors and ease the office space oversupply.
“Much of this improvement in market balances is likely to be attributed to more realistic real property valuations, after a significant decline in real (inflation adjusted) commercial property values since around 2015/16,” he said.
FNB forecasts three 25 basis point interest rate cuts in the first half of 2025, alongside an economic growth boost from 1% in 2024 to 1.9% in 2025 that are expected to drive a modest rise in commercial property sales activity. Additionally, demand for industrial and retail properties is likely to continue to exceed supply, while the office market is expected to see further improvement in reducing oversupply.
“This in turn, is expected to cause national investor demand for industrial and retail property to continue to exceed supply through 2025 and a continuation of the broad trend in the office market towards a smaller oversupply,” Loos said.
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