Remote work is a long-term challenge to office space – FNB property strategist John Loos.
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SIMON BROWN: I’m chatting with John Loos, property strategist at FNB. John, we are talking about the FNB Commercial Property Broker Survey for the second quarter of 2023. All sectors are under pressure – office, retail, warehousing, industrial. Given high interest rates, low GDP, inflation, and load shedding I suppose in that as well, not really a surprise that it’s tough out there.
JOHN LOOS: No, Simon, not a surprise at all. Look, the relative performances there between the sectors still hold, industrial being the strongest in terms of sales activity, followed by retail somewhere in the middle. According to the broker perceptions, the weakest has been the office sector, which one would expect. Given the increased remote work, hot-desking and hotelling of desk space and all these challenges to the office demand, you would expect the office sector to be the weakest. But yes, the order of performance still holds true. They’re all slowing, with industrial the strongest, office the weakest and retail somewhere in the middle.
SIMON BROWN: Office is not a surprise. I was chatting with Alexforbes yesterday on their results. They’re reducing the size of their Sandton head office – not because they’re employing fewer people but because of that hotelling, because of that hot-desking. That is a trend that a year-plus after the pandemic seems to be fairly well entrenched and has perhaps longer-term implications for office.
JOHN LOOS: Yes. there was a time a few years ago – not so long ago – where we all had our own desks allocated to us in a corporate head office. FNB, where I work, has been one of those. You’d be away on leave; a certain portion of the staff would be away on leave at any given time of the year. Some would be off sick, or some would be out travelling, visiting clients or whatever it might be, and a lot of desk space would be standing empty. Now, when you go to hot-desking or hotelling, you book one for daily purposes; and if you’re away you don’t book. So that reduces the total requirement.
Although there are many people claiming that work from home is a thing of the past, [there is] a greater degree of remote working now, a significantly greater degree than there was prior to Covid. Remote work is a long-term trend. It got bumped up a bit by Covid, but it’s a long-term trend that’s been coming for the past few decades as it proves and enables us to work more and more effectively from remote parts. I don’t expect this trend to go away, and that’s a long-term challenge to office space as well.
SIMON BROWN: Yes. Industrial and warehousing was down a little in this quarter, although it’s been sitting at sort of pre-pandemic levels in terms of activity from the brokers. This is a space that really has done very well, and we can see it in the listed Reits in this space as well. We were actually getting quite a boom, notwithstanding challenges around lack of growth and high rates and inflation.
JOHN LOOS: Yes. Look, I think it’s probably more the logistics space than manufacturing as such. I think that part of industrial property is probably not doing wonderfully at the moment, given that the manufacturing sector’s output has been in decline in recent times, battling seriously in many cases with electricity-supply issues. So the manufacturing part has its challenges. But even warehousing and logistics, although there’s been a structural change and new logistics, new warehousing requirements given the greater levels of online retail, that can only take it so far.
At the end of the day the overall economy performance and the need for certain levels of inventories which are boosted by good economic performance and weakened by bad economic performance, that overall economic performance therefore is key to the warehousing sector demands.
SIMON BROWN: The one that perhaps surprised me was retail. Of course there was the major dip during the hard lockdown in 2020 into 2021. But even the recovery from that was there, but it was kind of modest. And if you look at the property activity over the past six months, it fairly plunged in this period. Is this really just that if you looking to start a little retail business in this environment, you’re probably saying, ‘I’ve got to get my head checked; let me try again in six months or a year’?
JOHN LOOS: Yes. The Covid knock to retailers was seen in the TPN Credit Bureau’s data of tenants in good standing by retail, industrial and office – where retail tenants’ percentage in good standing with their rent system …. and the most recent data to some time last year was still the weakest of the three. Retail tenants took a very hard knock during lockdowns. A lot of shopping centres were totally closed down or just about – apart from the food part.
Then take a constrained consumer battling to recover from the Covid income knock now having to deal with higher inflation. It was the fuel-price inflation first, then the food-price inflation surge. Yes, inflation’s come off a little bit, but it’s still elevated. And then on top of that 475 basis points’ worth of interest-rate hikes on debt. That’s a lot to swallow for the consumers of the country.
So no, it shouldn’t be too surprising that the retail sector’s recovery out of Covid was ‘muted’, which I think is probably the best word for it.
SIMON BROWN: Yes, muted probably is the phrase.
John Loos, property strategist at FNB, chatting about the FNB Commercial Property Broker Survey for the second quarter this year, I appreciate the time.
