Office vacancy rates at lowest level in seven years

28-04-2016

Prime office vacancy rates in Cape Town decentralized are at their lowest level in more than seven years.

Vacancy rates in Cape Town decentralized have edged south since the beginning of 2012. This has happened to such an extent that in the first quarter of 2016 the combined (grades A+, A & B) vacancy rate stood at roughly 4%, the lowest it has been in more than seven years. What’s more, it is also now below its long-term (18-year) average vacancy rate, and below its ‘natural vacancy rate’ – both these rates are estimated to be about 6%. The Cape Town decentralized aggregated vacancy rate includes prominent decentralized office nodes such as Century City, Tyger Valley, Claremont, Rondebosch and Newlands, where vacancy rates currently range between 2% and 7%.

Nonetheless, the theoretical notion of a ‘natural vacancy rate’ (NVR) is borrowed from the theory of the non-accelerating inflation rate of unemployment (NAIRU), a widely used concept in economics. NAIRU is defined as the rate of unemployment at which inflation is neither accelerating nor decelerating. Similarly, the NVR is seen as the vacancy rate at which rents are stable. In other words, when actual vacancy rates drop below the NVR the growth in rentals accelerates, while a vacancy rate above the NVR means decelerating, if not downright declining, rentals.

In fact, as the graph that follows shows, market rentals have in recent quarters benefited from declining vacancy rates. Note from the graph the strong (r²=0,6) inverse relationship between the growth in market rentals and vacancy rates, with changes in the latter explaining as much as 60% of the change in the former. In the fourth quarter of 2015, market rentals in Cape Town decentralized were — on the whole — up by an impressive 10%, compared with the national decentralized market-rental growth rate of only 3%.

Whether or not the fall in the vacancy rate and its beneficial impact on market rentals will be sustained, remains to be seen. For now, however, prospects of even weaker economic activity, low levels of business sentiment and soft labour market conditions might place a damper on the demand for office space.

For more information, please contact John Lottering on 083 602 5522.