Commercial Rental Monitor 2020 Q4 - Predicting commercial market recovery

Category General

Predicting commercial market recovery

Tenant rental performance is strongly influenced by economic growth, as measured by GDP (Gross Domestic Product).

For the first time in a decade, the percentage of commercial property tenants in good standing has performed below GDP.

The 'hard lockdown' drop of -17.8% year-on-year in GDP is very much reflected in the corresponding sharp drop in the percentage of tenants in good standing during that quarter.

The fact that the tenant population's payment performance has only partially recovered in the 3rd and 4th quarter is arguably reflected in the fact that GDP too has only partly improved.

Having witnessed 2 quarters of considerable, but not "full" recovery in the percentage of tenants in good standing, which coincides with 2 quarters of significant, although still negative GDP growth recovery by the final quarter of 2020, real GDP growth remained negative at -4.1% year-on-year.

With indicators pointing towards the pace of economic recovery slowing down after rebounding off a very low base, this could make the last stages to "full" recovery of pre-lockdown levels an arduous journey.

Please click here to read the full Commercial Rental Monitor for 2020 Q4 or watch the video below.

Best performing tenant, but ominous signs for the Office Market

While the Office Property Market still shows the best tenant payment performance of the 3 major commercial property sectors at the end of 2020, it is not to say that significant financial constraints don't exist for this sector.

It appears likely that a portion of the financial pressure in the Office Sector can be seen in tenants downscaling their office space needs, translating into a rising vacancy rate through 2020 that is likely to continue into 2021.

The TPN monthly preliminary data extracts on a sectoral basis indicate that the poorest performing Retail Property Sector has nonetheless continued its gradual improving path.

However, the better performing Industrial and Office Sectors' tenant payment performance lacked further improvement during the 4th quarter. This is evidenced by industrial tenant performance treading water in good standing performance for 3 consecutive months, while office tenant performance stalled for the last 2 months of the year. So, like the economic numbers, rental data has pointed towards a slowing pace of recovery late in 2020.

Author: John Loos - FNB Commercial Property Finance