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Landlords of commercial buildings brace for fourth wave of Covid-19

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The predicted fourth wave of the Covid-19 pandemic in South Africa looks set to whack back the already beleaguered office property market even further, at a critical time when it looked as though it could begin a slow recovery.

This, if it happens, it will simply be a repeat of the period a few months back when the third wave scuttled hopes of a perceived return to some sort of normal.

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“Just when it looked as if more workers would return to the office, the third Covid-19 wave came along in June,” according to Rode & Associates’s Q3 State of the Property Market report. “Another wave closer to the end of 2021 means office property owners are bracing themselves for even tougher times over the short term as many workers will continue to stay away from the office,” it says.

FNB commercial property economist John Loos agrees, saying the office market not only has the normal economic challenge of job cuts in office-bound services sectors, translating into companies needing less space, but it is also challenged by “highly successful forced remote working” caused by the 2020/21 lockdowns.

“Broker surveys consistently point to many companies re-assessing their office space needs, and many planning to reduce the amount of office space leased or owned.

“This downscaling process may well still be gathering momentum. It is thus looking likely that office property will be the underperformer of the three main commercial property classes in 2021 as a whole and even beyond.”

In the long-term, Rode & Associates’s Erwin Rode feels the work-from-home trend is “overstated” as it is not suitable for many companies, especially large corporates. This is because people need face-to-face interaction to build a company culture and morale.

“This means a flexible or hybrid approach is likely to become the norm, for example, working three days a week at an office, if required,” he says in the report. The results of Rode’s second office vacancy survey continue to point to a high and rising amount of empty office space, with the national decentralised vacancy rates for grades A and B combined equating to an average of about 14%, “the highest this century”. And the figure could rise further.

“The large and growing amount of available space means tenants are spoilt for choice and are clinching eye-popping deals,” Rode says. Interestingly though, Loos notes, the most recent FNB Commercial Property Broker Survey reveals that vacant office properties are perceived to be selling slightly faster than occupied office properties – for the first time since the survey was started in early 2019. He wonders whether this implies that repurposing of offices is becoming more popular, although says it is “probably a bit too early to tell”.

Repurposing of office space into residential accommodation has been a growing trend over recent years, especially in some of the country’s CBDs, but it appears that not all office conversions are for this purpose. Many office properties have been redesigned to cater for flexible workspaces and this was on the rise even before the pandemic.

JLL data shows while flexible office space accounts for a relatively small proportion of office markets across most major gateway cities – averaging between 2% and 8% – the rise to this level was swift, with an average of 25% growth a year between 2014 and 2019. In 2019, it accounted for as much as 20% of leasing activity in large cities.

Gregory Davis, business development director for Africa at IWG Plc, says despite the impacts of Covid-19 on office space, these workspaces seem to be emerging as a “strong offering and solution” for a return to the work environment. Such spaces appeal to both tenants looking for flexibility and landlords wanting to differentiate their assets.

To this end, management agreements, also called operating agreements, are gaining popularity because they can provide greater resilience for building owners. Explaining this, Davis says a management agreement, in its simplest form, is a partnership between a landlord and a co-working or flexi-space operator.

The property owner is incentivised to fill vacant space and the space operator has the ability to manage the co-working space. In a management or operating agreement, the parties agree to share revenue generated from the co-working space.

“This is an increasingly popular trend and South Africa’s listed property sector continues to expand its flexible workspace footprint, primarily through partnerships with flexible workspace operators.”

Davis adds: “Commercial real estate landlords have an option to take over the ownership of the space themselves and work in conjunction with a flex operator to re-design and run the space as a flex space under a management agreement, fast-tracking the ability to return to a normalcy of operations in their space quickly.”

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