This is because it is exposed to the manufacturing sector, the major economic sector that typically weakens severely during recession, notes FNB commercial property economist John Loos.
“To most people, arguably the most visible signs of economic damage caused by the lockdown are in the retail sector... Less visible, perhaps, have been other major industries and the manufacturing sector is a key one that springs to mind – an economic sector strongly influencing the industrial property sector.”
Evaluating the risks of “normal” recessionary economic conditions emanating from recessionary pressures on key economic sectors related to major and certain smaller property sectors, he says it is likely that the industrial property sector will experience the most direct GDP pressure this year.
This is based on the historic behaviour of the strongly related manufacturing sector during recessions. “Typically, this sector is highly cyclical and also exposed to global economic forces. During the global financial crisis recession of 2008/9, quarterly manufacturing GVA (gross value added) plummeted by as much as 15.2% in Q2 2009, and was down by an extreme 10.6% for 2009 as a whole.”
By comparison, overall GDP decline for the entire 2009 year was only 1.5%. “By Q4 2019, the rate of decline in manufacturing GVA had already reached a significant 2.57%.”
Loos says a leading indicator of both manufacturing production and broader economic direction is the manufacturing PMI (purchasing managers index) “new sales orders sub-index” and that in February, prior to lockdown, this sub-index had reached a “lowly 31.2 on a scale of 0 to 100”.
This pointed to a likely worsening manufacturing recession this year even before the lockdown which caused this index to drop to 8.9 in April – its lowest level ever.
Further, a second key economic driver of industrial property, which is linked to its warehousing sub-sector, is its inventory levels which can also be highly cyclical and drop sharply in weaker economic times. Inventory build-up is “unnecessary and costly”.
While all three commercial property sectors have seen deteriorating vacancy rates, industrial property’s vacancy rates have more than doubled from 2.3% in 2015 to 5% last year.
The previous year the rate was 3.2%, states Sapoa’s Industrial Vacancy Rate report. “During 2019, base rental growth rate remained flat at 4.1% – the lowest levels since 2003.”
The market has fundamentally shifted as a result of the pandemic, and while national and multi-national food-related and pharmaceutical firms have maintained a form of financial continuity, the report says the “overwhelming majority of industrial occupiers have not been able to do so”.
“All industrial segments saw their vacancy rates increase during the 12 months ended December 2019. The vacancy rate of manufacturing property (1.6%) is the lowest among the industrial segments.”
The decline in manufacturing production in the last quarter of 2019 could see “heightened pressure” on the segment’s vacancies in the short to medium term given the lag between the economy and property fundamentals.
“While 2018 saw increased pressure on smaller box sizes, 2019 saw occupancy rates weaken across the board... This trend could be further exacerbated on the back of the Covid-19 epidemic and possibly compounded by a likely return of load shedding in winter.”
The Sapoa report also notes that larger tenants are still trading down into smaller boxes amid the challenging macro-economic environment and flat average usage of available space. Occupiers are looking for consolidation benefits and operational efficiency gains.
Industrial Vacancy Rates
National industrial property vacancy rates: 2018 vs 2019
◆Manufacturing: 1.4% → 1.6%
◆Multi-parks: 6.1% → 7.0%
◆Warehousing and distribution: 3.0% → 5.1%
◆Other: 3.8% → 8.1%
National industrial base rental growth: 2018 vs 2019
◆Manufacturing: 6.4% → 4.9%
◆Multi-parks: 3.0% → 4.7%
◆Warehousing and distribution: 3.9% → 4.0%
◆Other: 3.2% → 1.9%