The office sector, grappling with an oversupply of properties and high vacancy rates since the pandemic, may soon catch a ray of silver lining as improving economic conditions bring stability.
The sector, which has also struggled with property valuation writedowns in recent years, is seen as the weakest compared to its retail and industrial counterparts, according to the latest FNB commercial property broker survey on market balance.
However, this impact will not last much longer, notes property analyst Keillen Ndlovu, forecasting that the office market is likely to see vacancies stabilise and improve in the near future.
“Nevertheless, rental growth will only happen after a meaningful decline in vacancies. This will depend on the grade of properties as well as the location,” said Ndlovu.
While the office market remains oversupplied, it has made strides in reducing the gap between demand and supply since the peak of the post-lockdown slump in 2021, said FNB property strategist, John Loos.
Despite the oversupply across the country, the Cape Town office market stands out as the strongest since the pandemic.
The offices have been on the beneficial side of robust growth because of the overall positive indicators in the Western Cape region, driven by semigration, tourism and strong demand for space to set up call centres/business process outsourcing operations (BPOs) from global companies, said Ndlovu.
“This has led to vacancies falling from a peak of just under 14% in 2022 to 6.5% at the end of 2024, according to the SA Property Owners Association (Sapoa) fourth quarter of 2024 office vacancy survey. In comparison, Joburg office vacancies peaked at 19.5% in 2022 and stood at 16.7% at the end of last year,” he said.
The P-grade and A-grade properties are doing better than B- and C-grade properties. P-grade properties are qualified as top quality and state-of art facilities, meanwhile A-grade are offices that maintain a high quality of professionalism. B-grade offices are offices that have been renovated to meet modern standards, C-grade offices are in fair condition but have older style finishes.
Further reducing the vacancies in the office sector are some listed funds that are selling underperforming office buildings with high vacancies to private developers and funds.
Many of these well-located properties are being converted into affordable residential apartments, which has helped reduce vacancies in the office sector, said Ndlovu.
“It costs a lot of money to convert buildings from offices to residential and for this to be viable the office buildings will need to be sold generally at lower prices, say below R5,000/m². There are generally delays in zoning buildings by local authorities from office use to residential use. This can affect the viability of some of these projects.”
CEO of Africrest Properties Justin Blend told Business Day that office buildings are being converted into apartments to meet the high demand from young professionals for affordable, well-located housing with resort-style amenities. Last week alone, Africrest acquired four office parks, totalling over 40,000m², for conversion.
Redefine’s national asset manager for office, Scott Thorburn, attributed the lack of demand in the office space to the changed office environment since the pandemic, which is taking some time to normalise in addition to the move towards hybrid working models.
“Struggling businesses identified direct savings on office rental expenses while pandering to their staff’s preference for a flexible work week. Businesses now require smaller space in quality properties that have, or are near to, amenities and residential suburbs,” Thorburn said.
The shift to hybrid work and slow economic growth in SA are dampening demand for office space. Additionally, semigration from Gauteng due to poor local infrastructure has worsened the office market in the province, he added.
However, Thorburn said that Redefine’s office parks, once less popular, are now struggling to meet the rising demand. Well-located properties remain in high demand despite the shift to hybrid work.
“Many larger corporates, who previously occupied large office buildings as a single tenant, moved to smaller multi-tenanted properties in the aftermath of the pandemic.
“This resulted in totally vacant office properties flooding the market. These vacant properties have been the most challenging to re-tenant,” he said.
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