More corporates are choosing ownership over leasing, which is also making life “tricky” for landlords.
Durban’s office market is in a slump and while there is hope for improvement over the coming months, the reality looks bleak. “Very, very slow” is how Craig Woods, managing director of Tyson Properties Commercial in Morningside, describes it.
“Vacancy rates are fairly high and there are loads of options available in Riverhorse all the way through to Umhlanga. Dropping rental rates is not helping landlords as there are not many people looking to move.”
The only interest seems to be in shared-style facilities. “The Ridge is still the destination of choice, but clients are looking for real value and often this is now found in the shared space. Westville and Durban central are still quiet,” Woods says.
His “gut feel” is that more corporates are choosing ownership over leasing, which is also making life “tricky” for landlords. “Landlords are losing big reliable tenants who are buying their own buildings and leaving big gaps to fill. The issue is that there are not enough big players in Durban to start filling these spaces, which is dangerous for landlords and tricky for brokers.”
While Woods hopes the market will pick up throughout the rest of the year, he says it needs “big players” to move around and open gaps. Nationally, office vacancy rates are up by about 3.5% since last year, says Chad Shapiro, director and senior commercial broker at CTS Property Services.
Businesses, he says, are still in “consolidation mode” as the weak economy and rand drop since the elections has curbed the expected spike in office and commercial premises demand.
“There was a spike in interest post-election, but this has regulated for now. I believe the market will improve after an 18-month downscale.” Office properties that will perform better will be those in areas close to high-end residential suburbs that allow easy access for company owners to their offices.
Consolidation of companies and purchase of properties instead of leasing are still on the cards for business owners, so during this period the commercial leasing sectors in suburban areas should “hold strong”, Shapiro says.
Although the market is in a slump, he say there has been a rise in client interest for office tenancy requests. “My inquiry stats have increased by around 350% from April to May, and postelection client interest is noticeable.”
The markets in Cape Town, Durban North Coast and central and Gauteng “must be patient” as Shapiro says the areas are “perfectly located to improve as market conditions do”.
Erwin Rode of Rode & Associates predicts rental growth will be less than the increase in the Consumer Price Index (CPI). In older buildings, market rents could even decline slightly as tenants will tend to move into higher-quality space.
According to the forthcoming quarterly Rode Report, market rents for grade-A office space nationally is growing at about 3%, Rode says. “The sub-CPI growth rate is a consequence the stalling economy and over-building by speculative developers. When the market eventually recovers from this slump, rents will boom to catch up with the levels needed to make new developments financially viable.”
He says Sandton CBD is South Africa’s premier office location and was further enhanced with the construction of the Gautrain station. However, the resultant “over-enthusiastic” construction activity has now led to market rents declining.
“Currently, Pretoria decentralised office rents are the best performers, growing at 10% in the second quarter. Pretoria’s economy has been one of the major beneficiaries of the ‘New South Africa’ through the aggressive expansion of the civil service.”
The question Rode poses, however, is whether this is sustainable considering the state’s “fiscal crisis”.