The vacancy rate is probably the closest that the property market has to a coincident indicator. The recently published SAPOA vacancy rates suggest that the South African office market remains weak and that rentals will remain under pressure in 2010.
Of the twenty Johannesburg nodes measured by the SAPOA only six nodes showed an improvement in vacancy rates in the past quarter. These include Bedforview, Constantia Kloof, Houghton, Melrose and Randburg. But in general the conditions in decentralised nodes worsened over the past two quarters. In Sandton, prime or “A “grade vacancy rates increased from 5.9% a year ago to the present 10.2%. The picture is little better in for instance Rosebank which has seen “A” grade vacancy rates rise from 7.7% a year ago to the present 20.2%. In Cape Town, vacancy rates in decentralised nodes have followed a similar trend. Century City and Claremont are recording vacancy rates of 14, 6% and 17% respectively. Conditions seem to be better in Durban and Pretoria which have seen lower levels speculative development. It is worth underlining that grade properties in South African CBD’s are showing lower vacancies than that seen in decentralised nodes. The vacancy rates for a grade space in the Johannesburg, Cape Town and Pretoria CBDs are 6.6%, 10.3% and 2.4%. The Durban CBD however seems to be losing momentum with a grade vacancy rates rising to 18.4%.
The situation in the B grade office market seems to be somewhat better. For instance the Sandton B grade vacancy rate is lower than a year ago, and in Claremont the B grade vacancy rate has declined from 9.2% to 4.0%. This possibly suggests that under the present economic environment, tenants could have decided to opt for more affordable lesser quality space.
In attempting to understand the implications of these figures it should be underlined that the “natural” or equilibrium vacancy rate for the South African office market is approximately 8%. International studies suggest that rentals generally fail to rise in real terms when vacancy rates breach their natural rates. It implies that under present market conditions it is unlikely that rental escalations will be significant in the short term – namely much more than the inflation rate of 4%.
The reduction in building activity should stabilise vacancy rates in the next few months and it is likely that most decentralised nodes will see vacancy rates decline during the course of 2011.
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