Back to the office for South Africans

Recent recoveries in South Africa’s office property market are partly due to a shift away from remote work and a return to the office for many companies.

In the latest FNB Property Broker Survey, 20% of brokers indicated that demand for office space is partly influenced by companies returning employees to the office, particularly in the call centre sector. 

FNB Commercial Property Finance senior economist John Loos said this market could emerge from the doldrums. However, he warned that the sector is still in its “adjustment and downsizing” phase.

In its economic forecasts, FNB predicts that the local office property market will strengthen between 2025 and 2027. 

Loos explained that this expectation is primarily driven by macroeconomic factors, including FNB’s economic growth forecast, which points to an improvement in the 2025 to 2027 period compared to recent years. 

In addition, interest rates are projected to settle at a mildly lower prime rate of 10.5% later this year, down from the 11.75% high that persisted until September 2024.

However, despite this expected improvement, Loos anticipates that the office market will continue to underperform compared to the other two major commercial property sectors, retail and industrial. 

“Our recent FNB Property Broker Survey suggests there may be ‘upside risks’ in the office market, with a few potentially positive unknowns to consider,” he said.

FNB’s Property Broker Survey measures brokers’ perceived sales activity levels on a scale of 1 to 10 across commercial property sectors

The survey for the first quarter of 2025 recently showed the most notable increase in office property market activity. 

While the office sector has been the weakest performer for years, its activity rating rose from a multi-year low of 3.54 in the second quarter of 2024 to 4.95 in the first quarter of 2025. 

While modest, this rating has now surpassed that of the retail property market, which recorded a 4.79 rating in the first quarter. The industrial property market remains the strongest, with a sales activity rating of 5.69.

Loos explained that the growing demand for office space may be partly linked to declining vacancy rates in recent years, which improve prospects for better returns on office property investments.

According to MSCI data, the office property market experienced a significant rise in national average vacancy rates between 2015 and 2022, climbing from 9.4% in 2014 to a peak of 18.4% by 2022.

However, in 2023, vacancy rates began to decline, reaching 16.2% that year. 

By the first quarter of 2025, the FNB sample of brokers continued to report a decline in office vacancy rates on an aggregated basis.

Demand-side factors

Loos explained that several factors are behind the lower vacancy rates in South Africa’s office property market, with demand and supply-side factors contributing.

However, demand-side factors are still a “mediocre” driving force at best, as macroeconomic factors do not appear to be driving significant demand for office space. 

South Africa’s GDP growth has been weak, recording just 0.6% in 2024. 

In addition, a key economic driver of office demand – the Finance, Real Estate, and Business Services (FREBS) sector – isn’t looking much better. 

While this sector’s Gross Value Added (GVA) growth has historically outperformed overall GDP, office space demand is more directly linked to employment growth in this sector. 

Due to technological advancements and efficiency gains, employment growth in the FREBS sector has lagged. 

In fact, over the past four quarters, employment growth in this sector has been in a year-on-year decline. 

“Given this, macroeconomic conditions don’t appear to be a primary driver of increased office space demand,” Loos said.

In addition, Loos said return-to-office trends have a definite but limited impact on office space demand in South Africa.

He pointed out that South Africa lacks comprehensive data on the extent and success of return-to-office initiatives. 

Moreover, many companies retained their office space during Covid-19 lockdowns, meaning that bringing employees back to the office does not necessarily translate into increased demand for office space. 

However, he added that some companies may require more space due to this shift.

In the FNB Property Broker Survey, 20% of brokers indicated that demand for office space is partly influenced by companies returning employees to the office, particularly in the call centre sector. 

Only 2% of brokers reported continued downsizing due to remote work – significantly lower than in previous years.

Supply-side factors

In contrast, Loos said that supply-side constraints play a major role in office space demand.

“While demand-side forces may have contributed to declining vacancy rates and improved investor confidence, supply-side constraints appear to be the key factor,” he said.

He explained that office space construction activity is at multi-decade lows. 

Stats SA data shows that office building plans passed in 2024 were 83% lower than in 2014 – the year when national office vacancy rates began their multi-year rise. 

In addition, the total square meterage of plans passed in 2024 was 41.7% below 2023 levels. 

“Historically speaking, new office space construction is currently at exceptionally low levels. This has helped the market gradually adjust and reduce oversupply,” he explained.

Investor interest in repurposing office space for residential use is also helping to reduce oversupply, particularly for older, lower-grade office buildings. 

The latest FNB Property Broker Survey showed that 20.5% of office sales are for residential conversions. 

This trend is especially prominent in Greater Johannesburg, where vacancy rates are among the highest in the country. 

Brokers in Johannesburg estimate that nearly 40% of office sales activity is driven by residential repurposing.

Loos added that improved tenant affordability is also an important factor. “The impact of office rental market corrections in recent years should not be underestimated,” he said. 

“A significant decline in real rentals since 2015/2016 has made office space more affordable, which could eventually support increased demand.” 

In real terms, the average base rental per square meter for the office market declined by 15.9% from 2017 to 2023. 

“Predicting when the office market will fully transition from an oversupply situation to equilibrium remains difficult, both in the tenant and investment markets,” Loos said. 

“At 12.6%, the national average office vacancy rate remains above the long-term average, though it has been steadily declining.” 

“While it is too early to expect office property returns to outperform industrial or retail, supply-side factors continue to support market correction.”

“With little new office space being built and many older office buildings being repurposed into residential properties, the office market’s demand-versus-supply fundamentals are steadily improving.”