Owners challenged by falling demand, increasing costs and downward push on rentals
Economic pressures on businesses and consumers are having a knock-on effect on the country’s commercial property market as landlords face falling demand from tenants.
This demand decline, along with tenants downsizing, oversupply and downward pressure on rentals are among the biggest challenges facing commercial property owners, says Pam Golding commercial managing director, Mark Latham.
“We are also seeing increases in non-rental related costs, which is putting further pressure on occupancy costs.”
Latham says falling demand for commercial property is a result of the economic environment as there is “little to no economic growth and few new market entrants”. Tenants are also “actively seeking” to reduce occupancy costs in reaction to the business environment.
Latham says: “Non-rental related costs, property taxes, operating costs and utilities are putting further pressure on the rentals as these costs are out of the control of occupiers, resulting in pressure to lower rentals as overall occupancy costs increase.”
The South African Property Owners Association’s (Sapoa) latest Rates and Taxes Report, which evaluated last year’s environment, states rates and taxes had become the “fastest growing operating cost category” over a 10-year period.
Over the 10 years from 2008 to 2018, rates and taxes increased by 133%. Municipal rates and taxes, since 2000, have “consistently increased at a faster rate” than inflation. “In 2000, rates and taxes worked out to 17.4% of total operating costs. By December 2018, this had escalated to 24.7%.
On a weighted basis, rates and taxes remains the second-largest contributor to total operating costs, behind electricity.” In the current environment, Latham says flexibility and value for money are key for tenants as they need to be able to grow, and contract, if necessary.
This factor has led to the rise in the co-working trend and growing emergence of serviced-office providers that offer tenants the flexibility, value for money and high-quality premises the market is demanding.
“More and more traditional occupiers are moving into this type of space due to the efficiencies, benefits and cost savings.” In the coming months, the co-working trend is predicted to have the biggest impact on the office property market.
“These occupiers drive a significant amount of demand for space. This can be both a positive and a negative for the market,” Latham says, explaining that the positive is that landlords can let their vacant space to such operators.
“However, not all these service providers will be viable in the long term. As the competition hots up, the price of leasing co-working space will fall. If these spaces can’t be let, the underlying rental paid to the landlord can’t be paid and they will fail.”
He says landlords could consider providing similar environments to their tenants and focus on attracting and retaining them by offering value for money, flexibility, high levels of customer service and building long-term relationships.
JLL’s Durban City Report, released in June, states the office market saw a turn in the vacancy rate from 12% in Q3 2018 to 13.9% in the last quarter of the year.
In Q1 2019 there was only a marginal improvement to 13.5%. Ongoing projects, it adds, “point to a further growth in the rate in the course of 2019”. “eThekwini continues to display a polarised trend with office demand in the CBD losing to competition in the Umhlanga and La Lucia nodes.
Demand in the city does not seem to be growing. Rather, existing occupiers are upgrading their accommodation to the detriment of older nodes and buildings.”