Raul Flores, Director and CEO of TITAN Property Group, looks at how to navigate recovery and shifting tides across this real estate industry sector
The South African (SA) commercial real estate market is currently in a fascinating period of recalibration and cautious optimism. After facing significant headwinds in recent years due to economic uncertainty, load shedding and persistent high interest rates, the market is showing discernible signs of recovery. Industry experts call it a "slow but disjointed" recovery. As of Q1 2025, various segments are performing at different paces, driven by shifting economic factors and evolving tenant demands.
A Glimmer of Hope across SA’s Commercial Property Market
A key driver of this newfound positivity is the anticipated further easing of interest rates. The South African Reserve Bank (SARB) has signalled more interest rate cuts for 2025, is expected to make debt cheaper, encourage investment and ultimately boost property values. This is a welcome change from the high interest rate environment of 2024 but has divided analyst opinions. While the overall economic growth forecast for 2025 remains modest, (around 1.5% to 1%), it still represents a significant improvement from the 0.6% growth seen in 2024, providing a more stable foundation for the property market.
Furthermore, the apparent end of load shedding in Q2 2024 and the successful conclusion of the 2024 elections, leading to the formation of a Government of National Unity (GNU), have injected a degree of political and economic stability. These factors, while not immediately reflected in property transactions due to lengthy transfer processes, are expected to significantly impact investment activity in the first half of 2025.
Industrial Sector: The Undisputed Outperformer
The industrial property market continues its reign as the strongest segment within SA’s commercial real estate. In Q1 2025, nominal gross market rentals for industrial space of 500m² surged by 7.3% year-on-year, exceeding the 6.7% growth of Q4 2024. These rental levels are now approximately 25% higher than pre-pandemic figures, a testament to the sector's robust performance despite broader economic challenges.
The success of the industrial sector is largely attributed to persistently low vacancy rates, which stood at a mere 3.7% nationally in Q1 2025. This low vacancy rate is sustained by minimal speculative development and a rising demand for large-scale warehouse and logistics facilities. This is fuelled by the continued growth of online retailing and the increasing importance of supply chain resilience. Key players such as Fortress and Growthpoint are actively investing in logistics-centric properties, with Fortress reporting a meagre 1.5% vacancy rate in its logistics portfolio in late 2024. While the manufacturing sector remains under pressure, the retail sector's resilience and the fundamental shift towards e-commerce continue to underpin the strong demand for industrial space.
Office Market: Gradual Recovery amid Structural Shifts
The office sector remains the most challenging segment, grappling with high vacancy rates and a structural oversupply, largely due to the pervasive adoption of hybrid and work-from-home models. However, there are signs of a modest recovery. The average national vacancy rate for grades A+, A and B office space in decentralised nodes dropped to 12.8% in Q1 2025. This is a decrease from 13.9% in Q1 2024. While still above the long-term average of 9.5%, this indicates a positive trend.
Nominal gross market rentals for decentralised Grade A space nationally rose by 4.8% in Q1 2025. Cape Town has been at the forefront of this recovery, with decentralised nominal rental growth remaining in double digits (11.7% in Q1 2025) and rentals being 22% higher than pre-Covid-19 levels. Durban also saw strong growth at around 5%. Johannesburg's office market recovery has been slower due to elevated vacancies, though rental growth has picked up to 3.3%.
A significant trend in the office market is the increasing pressure on investors to repurpose and reposition underperforming assets. Older, lower-grade office buildings are being considered for conversion into residential units, laboratories or mixed-use schemes to adapt to the evolving landscape and generate returns. This adaptability will be crucial for the long-term health of the office sector.
Retail Property: A Cautious Comeback
After facing significant headwinds, the retail property sector is also showing signs of a gradual comeback, with investor demand now outpacing supply in some areas. This resurgence is driven by a stabilisation in consumer spending, a strategic repositioning by retail landlords and a flight to quality. Real retail sales increased by 4.1% in Q1 2025, supported by higher take-home pay and lower interest rates. The implementation of the two-pot retirement system, which allows partial access to retirement funds, is also expected to free up consumer liquidity, further boosting retail activity.
However, the retail market remains highly competitive with over 25 million square metres of formal retail space across more than 2,000 existing shopping centres. Innovation and unique experiences are vital for success as consumers become more mindful of their spending. While new, well-located neighbourhood and convenience retail centres are seeing capital appreciation, non-dominant regional shopping centres continue to face pressure. The ability of landlords to offer experiential retail and embrace omnichannel strategies will be keys to attracting and retaining customers.
Hospitality and Alternative Sectors: Niche Opportunities
The hospitality sector, severely impacted by the pandemic, is also on a recovery path. JLL remains "very bullish" about hotel development in Africa, seeing the continent as the "last frontier" for expansion by global hotel players. Occupancy levels for major hotel groups are showing improvement, with Southern Sun exceeding 60% for the first time since 2019. Investment into "alternative" commercial property sectors such as hospitality, education, healthcare and living, has seen a significant reversal of previous trends, growing by 50% in 2024. Student accommodation, in particular, continues to be a high-performing niche, with strong returns for investors.
Investment Trends and Outlook
Overall investment deal flow in 2024 exceeded R27 billion, a 34% increase from 2023, indicating renewed investor confidence. Gauteng dominated deal volume (51%), with the Western Cape solidifying its position as a major investment hub (31%). The office segment paradoxically recorded the highest deal flow (30%), primarily driven by business rescue disposals from the distressed Rebosis Property Fund. The retail segment also experienced robust growth, though with fewer, larger deals.
Looking ahead, while industrial property may have already captured much of its structural upside, the retail and office sectors stand to benefit further from a more favourable economic environment and declining interest rates. Investors are increasingly focusing on diversification, looking beyond traditional asset classes to include mixed-use developments and alternative sectors that align with evolving demographic and lifestyle trends. The ability to adapt to changing market dynamics, focus on well-located, high-quality assets, and embrace innovative repurposing strategies will be crucial for success in South Africa's dynamic commercial real estate landscape.