2020 will be remembered as the year when the unthinkable happened – and a defining year for South Africa’s economy. For the commercial property sector and the South African economy as a whole, the effects of the Covid-19 pandemic are far from over – and they are likely to last a long time.
As the country’s lockdown levels are worked through the various phases, and commercial activity attempts a return to the new normal, there are several notable changes in the way business is done – and the way life is lived.
In this commercial property advice post, we’ll take a deeper look at some of the economic consequences of the pandemic and how tenants and property investors alike can adapt to prosper in these trying times.
Suddenly there was COVID
The sweeping changes that have taken place in our daily lives since March 2020 make it hard to believe that the coronavirus outbreak is just a few months old. The rapid spread of a disease that first made its presence felt in China in the latter part of 2019 has been astounding – and it caught many of the world’s leading nations unawares.
As countries scrambled to impose quarantines, lock down their citizens and borders, and provide essential medical assistance to those infected with the virus, some have managed to contain COVID-19 better than others.
South Africa’s quick action in implementing a nationwide lockdown was lauded by experts and citizens from all walks of life as a decisive, life-saving measure – but its economic impact has been devastating.
A major shock for an already weak economy
Recent data from the Bureau for Economic Research (BER) paints a picture of the SA economy that can only be described as worrying.
With negative movements in almost every indicator, the country’s commercial output has taken a serious knock – and this will have repercussions for commercial property.
- Retail activity dropped more than 50% in April on an annualised basis. This was largely due to the level 5 lockdown which rendered all but the most essential of businesses inoperable.
- While this trend reversed strongly in May under the level 4 trading regulations the economy still recorded sharply lower sales and wholesale purchasing levels compared with the same period in 2019 – 12% and 20.7% respectively.
- These economic shocks are made worse by the fact that they are rattling an already weakened consumer base and investment environment. The national GDP expanded by a meagre 0.2% in 2019 with negative growth having been recorded in the third and fourth quarters of the year.
Unlike the situation in countries like the US and China – which entered the battle against COVID-19 with strong economies – South Africa’s chances of a rapid post-lockdown bounce back are moderate at best.
With companies encouraging employees to work from home and more than 16 000 restaurants having closed their doors permanently, the onus is on South African businesses to rethink, regroup and rebuild as they play a vital role in the country’s post-Covid recovery.
Serious challenges and Opportunities in the Commercial Property Sector
Battling an unexpected, invisible enemy is no easy task – and the commercial property industry has taken several positive steps to ensure stability and weather the storm.
When it became evident that a nationwide lockdown was a very real prospect, tenants and landlords across the country began to negotiate.
- The past few months have seen increased flexibility where leases are concerned and a general sense of goodwill – especially when it comes to tenants who find themselves in sudden financial hardship.
- Nonetheless, the economic realities of a lengthy lockdown and major contractions in the retail and entertainment sectors are being felt strongly by property owners and their tenants alike.
In the midst of a once-in-a-lifetime pandemic and sudden economic turmoil, the commercial property industry was quick to unite and form an effective body.
The newly formed Property Industry Group is engaging actively with government and other stakeholders to ensure the survival and future viability of office buildings, retail spaces and light industrial facilities across the country.
Property owners and the businesses they let to will need to act swiftly and think creatively to repurpose their commercial spaces for the post-lockdown economy – and many of them are already doing so.
Reshaping commercial spaces from the bottom up
The state of the commercial property sector has been good over the past few decades, with a 9% expansion in 2019 underscoring this positive trend.
While the current year may see a contraction in the sector it’s also an opportunity to reflect on past successes and streamline the industry for the new world that awaits us all after the pandemic.
- The longer the virus circulates – requiring us to adhere to social distancing and remote working protocols – the more permanently our consumer behaviour and work culture may change.
- Companies are already experiencing the “empty office” phenomenon as they encourage workers to stay home and telecommute. This trend will inevitably result in premature lease negotiations as tenants try to cut costs by shedding unutilised space.
- The already high national office space vacancy rate – which topped 11% in the third quarter of 2019 – will put downward pressure on rentals as it creates a “tenant’s market” – rental growth is already down to 0.7% from 2.5% last year.
- Subletting and the creative use of non-premium office space for small-scale warehousing and other viable purposes could help ease the financial pain of vacancies for some landlords.
- Retail premises are already reporting vacancies, payment delinquencies and a large drop in demand for new rentals. Some of these spaces may need to be repurposed in the short-term – however long that may be – until customers feel comfortable dining out and spending their leisure time at malls again.
With home prices predicted to fall between 3.9% and 14.5%, a similar trend may emerge in the commercial property market. Owners should brace themselves for short term drops in asset values and rather focus on retaining tenants and maintaining healthy cash flow going forward.
While the vacancy and average rental price figures may paint a gloomy picture of the sector in 2020 it’s important to keep a long-term perspective as we adapt to the unprecedented COVID crisis.
There are also glimmers of hope in the industry as some sectors find themselves busier than ever in the age of social distancing.
eCommerce opens new doors for light industrial property
Retail is an essential aspect of economic life – and just because fewer people are visiting shops doesn’t mean they aren’t buying the essentials they need.
The shift from physical to online shopping has sparked an eCommerce boom – and all those online retailers need warehousing space to store their goods for prompt delivery.
The light industrial sector, which was already showing promising signs of growth in 2019 (especially in Cape Town), may become the asset class of choice in the commercial property sector this year.
- Retailers will be keen to secure plenty of warehousing space – with extra capacity to accommodate rapid growth if their sales continue to flourish.
- This presents an opportunity for industrial property owners to secure stable leases at a time when office space is having to become more flexible.
- Mixed-use properties with both industrial and commercial premises may need to be renovated inexpensively to expand the warehousing floor space they can offer in the short to medium term.
Conclusion: 2020 is a time to weather the storm and prepare for the post-COVID era
As the economy takes one of the biggest hits in recent memory it’s tempting to dwell on the negative – but there are plenty of opportunities presenting themselves for commercial property owners.
Flexibility, good tenant relations, and a long-term mindset are essential for anyone hoping to prosper over the coming months and even years.
As the recovery slowly takes place, property owners who took proactive steps to reshape their business models will be rewarded with manageable debt levels and lower vacancy rates.
If you’re rethinking your property strategy, you may benefit from the expertise of an experienced area specialist. Contact the Commercial Space team today.