Brokers perceived a market showing signs of a broad weakening in demand-supply balance. Only the Industrial market is perceived as having demand that exceeds supply, but with that margin diminishing, and the City of Cape Town metro region shows the strongest all-round demand-supply balance.
We continue with the 2nd quarter 2023 results of our FNB Commercial Property Broker Survey, which surveys a sample of commercial property brokers in and around the 6 major metros of South Africa, namely, City of Joburg and Ekurhuleni (Greater Johannesburg), Tshwane, eThekwini, City of Cape Town and Nelson Mandela Bay.
Given FNB Commercial Property Finance’s strong focus on the “Owner-Occupied” Property Segment, a pre-requisite in selecting broker respondents is that they deal in owner-serviced properties, but a portion will also have dealings in the developer or investor markets as well as in the listed sector.
In this report, we deal with questions relating to the perceived balance/imbalance between demand and supply of properties being transacted in the main markets. Market “strength” refers to a relatively strong demand level relative to supply, and vice versa for market “weakness”. These questions include estimates of average times of properties on the market prior to sale, as well as perceptions of whether demand exceeds supply or vice versa.
Key themes that emerge from the results are:
The Industrial Property Market is still perceived to be the strongest of the 3 major commercial property sectors, i.e., Industrial, Retail and Office, albeit also showing signs of approaching weakening.
A perceived oversupply of property on the market relative to demand remains in the Retail and Office property classes, but demand is perceived to exceed supply in the Industrial Market, albeit by a small and diminishing margin.
In the area of Industrial Property, it appears to be the 3 coastal metros, i.e., eThekwini, Nelson Mandela Bay and Cape Town, where the relative market strength lies, especially eThekwini, while Gauteng’s Greater Johannesburg region remains the weakest by a significant margin.
In the area of Office Property, all major metro regions are perceived to be heavily oversupplied. The City of Cape Town, however, is perceived to be the least oversupplied of these.
In the area of Retail Property, market strength differs vastly by metro region.
Demand is perceived to exceed supply significantly only in Cape Town, while at the other end of the metro spectrum is Greater Johannesburg with a very significant oversupply.
Average Time on the Market is perceived to have increased in 2 out of 3 major commercial property classes.
From our residential market survey, we found the movement over time in the estimated average time of properties on the market prior to sale to be a useful indicator of changes in the balance between supply and demand, an increase in average time of properties on the market prior to sale signaling a deteriorating demand relative to supply and vice versa.
We have attempted to apply this same questioning to our commercial property broker survey, splitting the survey by the 3 main property classes, namely Office, Industrial and Retail, and splitting it further by “Vacant Properties” vs “Occupied Properties”
The relative picture between the 3 major property sectors is still one where brokers perceive the Industrial Property Market to be the strongest of the
3 classes, with an average time on the market for occupied industrial properties of 17.19 weeks being quicker than the 20.57 weeks in the case of retail and 27.4 weeks for office space.
Vacant industrial properties, too, averaged the shortest average time on the market of the 3 segments to the tune of 15.66 weeks, compared to 19.66 weeks in the case of retail space and 24.43 weeks in the case of office properties, in the 2nd quarter 2023 survey.
In the FNB Commercial Property Broker Survey, it is far more difficult to estimate average time on the market than is the case in the FNB Residential Property Estate Agent Survey. This is due to a far smaller sample size in the number of transactions, so from quarter to quarter the different groups of respondents can perceive average time quite differently, and the data moves can be more volatile.
However, in an easier-to-answer follow up question as to whether the past 6 months has seen average time of properties on the market increase, decrease or remain unchanged, brokers appear better able to assess the direction in average time as opposed to the actual average time itself. And, on average, it is only the Industrial Property Market where brokers still have a slight bias towards “diminishing average time on the market” (i.e., market strengthening) as the broader property market weakens.
Perceptions regarding the direction in “average time on market” over the past 6 months
The follow up question to the average time on the market estimate, is asking respondents whether they believe that the average time on the market has increased, decreased or stayed the same over the 6 months prior (i.e., since the 4th quarter of 2022).
Out of the responses we create an index by allocating a +1 score to an “increased” response, a zero to an “unchanged” response and a negative -1 to a “declined” response.
The scale of the “Index for direction of change in time on the market over the past 6 months” is thus from +100 to -100. A score of +100 would imply that 100% of respondents perceived an increase in time on the market over the past 6 months (market weakening) and -100 would imply 100% of respondents perceiving a decline, while a zero level would mean that those providing an “increased” response is equal to those responding with “decline”.
2 of the 3 property classes, i.e., Office and Retail, shifted, from negative readings in the prior quarter, to positive (market weakening) readings in the 2nd quarter 2023 survey. This implies that the aggregate of responses in these sectors points towards a lengthening (market demand-supply balance deteriorating) in average time of properties on the market compared to 6 months prior.
The Office Index recorded the most positive magnitude of +31.7, implying that on average the group of brokers surveyed perceived lengthening average time on the market over the 6 months, by a noticeable margin.
The Retail Index showed a less significant positive reading of +20.5 in the 2nd quarter.
The Industrial Property Market’s reading remained only slightly in negative territory, to the tune of -5.1, but this was significantly less in magnitude than the previous quarter’s -27.12. This the 10th consecutive quarter in which brokers indicated a bias towards declining average time on the market in the Industrial class, although the bias is no longer very significant, suggesting that this market may also be heading towards a lengthening average time on the market fairly soon.
Therefore, this survey question points to the emergence of an “increasing time on market” (market weakening) bias in 2 of the 3 sectors in the 2nd quarter of 2023 survey, while the Industrial Market’s negative reading has diminished in magnitude, pointing to a broad weakening in the commercial property market as rising interest rates and a slowing economy lead to weakening investor confidence and therefore demand.
Demand vs Supply Strength Perceptions
An additional supply-vs-demand question is asked, where the respondents are asked whether they perceive “demand far exceeds supply” (option 1), “demand exceeds supply somewhat” (option 2), the market is in balance” (option 3), “supply exceeds demand somewhat” (option 4) or “supply far exceeds demand” (Option 5).
The Office and Retail Property classes have significant portion of respondents still pointing to “supply exceeding demand”, either “somewhat” or “far”, compared to those pointing to demand exceeding supply. The oversupply is particularly severe in the Office Market. The Industrial Market returns a response where respondents on average see demand exceeding supply in this market, i.e., 42.3% perceiving demand to exceed supply versus 33.9% perceiving supply exceeding demand (23.7% perceiving a balance). By comparison, 52.3% still perceive supply to exceed demand in Retail Property and a massive 73.4% in the case of the Office Property Market.
We create an index from the responses, option 1 receiving a score of +2, option 2 a +1 score, option 3 a zero score, option 4 a -1 score and option 5 a -2 score.
The index is thus on a scale of +200 to -200, where +200 would imply 100% of respondents choosing option 1, and -200 meaning a 100% option 5 response.
In the 2nd quarter of 2023 survey, the Industrial Property Market returned a slightly positive +5.09 reading, which would imply that demand is perceived to mildly exceed supply. This is followed by Retail at a negative -34.11 and Office recording the weakest. -100.02.
In short, respondents as a group still perceive the Retail and Office markets to be oversupplied, the latter of the 2 markets “heavily” oversupplied but the Industrial Market still very slightly undersupplied relative to demand.
Provincial Comparisons – Demand vs Supply Strength Perceptions
Due to smaller sample size at individual metro level, we are concerned with volatility in the surveys, and therefore opt to use a 2-quarter average of survey responses for the Demand-Supply Perceptions Indices for individual regions.
Examining the perceived market balance by major metro region for the 1st half of 2023, the Office Space survey points to Greater Joburg having the weakest demand vs supply balance, with its index being the most negative at -132.76.
This reading is weaker than Tshwane (-116.67) Mandela Bay (-100) and eThekwini (-75.91), with Cape Town being the “least weak” of all the regions with a negative reading of -45.54.
In the Industrial Market, Greater Johannesburg is the weakest market, with a negative reading of -107.01, followed by Tshwane with a positive of +50. The strongest of the 5 were the 3 coastal metros, eThekwini with a particularly strong +122.22 positive reading, Cape Town with +88.33 and Nelson Mandela Bay +74.1.
In the area of Retail Property, the survey also points to the weakest demand-supply balance being in the Greater Johannesburg region, while Cape Town is the strongest.
Greater Johannesburg showed a negative reading of -152.45, followed by eThekwini with -66.67. Nelson Mandela Bay was next with -20, and Tshwane with -4.13.
City of Cape Town recorded a very significant positive reading of +112.5.
In short, perceptions regarding demand relative to supply remain weak in both the Office and Retail Markets, albeit less so in Retail than in Office. However, the perception is that Industrial Property Market investor demand exceeds supply on a national average basis, albeit by only a small and diminished magnitude.
In 2 of the 3 property classes, i.e., Retail and Industrial, the 2nd quarter survey saw a weakening in the Demand-Supply Perception Indices. And In 2 out of 3 property classes, i.e., Office and `Retail, the survey saw a bias in broker perceptions towards a lengthening average time of properties on the market prior to sale, while the perception of decreasing average time on market was receding in the industrial Market.
This survey component therefore generally points towards signs of commercial market weakening, and indeed we believe that further such weakening should be expected in the near term.
We have seen the survey’s market activity ratings weaken mildly in all 3 markets in the 2nd quarter, so we would expect the market demand-supply balances to weaken too.
This expectation is also based on the FNB forecast of significantly slower economic growth in 2023, compared to last year, with the full impact of very significant recent interest rate hikes (475 basis points’ worth since late-2021) and a slower world economy still to be felt. And ongoing electricity load shedding has added to the list of cost and economic pressures for commercial property. These factors are expected to further weaken investor demand for commercial property in the near term.
The Industrial Property Market remains the strongest one in terms of demand-supply balance, followed by Retail, with the Office Market being the weakest. A weak Manufacturing Sector persists, however, while economy-wide inventory accumulation will likely remain weak in a recessionary economy in 2023. The Industrial Property Market, therefore, also has its own pressures too, even though it has benefited relatively from changes relating to a gearing up for greater online retail, and all the warehousing and logistics requirements associated with this.
The Office Market remains the property class with the most significant longer-term challenges. Not only does weak employment growth in key services sectors hamper its demand growth. “Elevated” levels of remote working and improved desk utilization (through greater hot desking and hoteling) compared to pre-lockdown levels also constrain demand for office space, and thus the appeal of this property class.
High office vacancy rates nationally 18.5% in 2022 according to MSCI data) tell only a part of the weak story. Within many currently tenanted offices, daily attendance rates are still noticeably lower than they were in pre-lockdown days, and one would think it only a matter of time before certain companies reduce their office space requirements, exerting further pressure on the performance of this property class.
A portion of the investor demand for this property type may thus be for repurposing purposes, residential repurposing being popular, because the need for office space promises to remain subdued in the near term.
At a major metro region level, the 1st half of 2023 continued to reflect the key regional theme in South Africa of late, i.e., that both business and household sentiment is the most positive in the Western Cape region (as seen in strong skilled labour “semi-gration numbers to that region), and that this region is likely to be an economic and property market outperformer in the SA context.
The City of Cape Town Metro continues to return the strongest perceived demand-supply balances in 2 of the 3 major commercial property markets, i.e., Office and Retail, while returning the 2nd strongest reading in Industrial Property. It also has also had the strongest residential market recently, further underlining the province’s popularity.
The Greater Joburg region returned the weakest demand-supply readings in all 3 markets, as it has done for some time.