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Developments in Umhlanga and CBD behind the excess

Offices vacancies in the eThekwini region still have the highest average vacancy rates in the country and are being fuelled by companies leaving accommodation in Westville and Hillcrest.
Speculative developments in the Umhlanga region as well the Durban CBD again beginning to attract developer interest are also contributing to the average vacancy rate of 12.3% – a figure shared with the City of Johannesburg.

This is according to the most recent JLL Durban Office Market Report which reflects on the sector’s performance in the first quarter of this year. Vacancy rates in the Nelson Mandela Bay Municipality are at 9.9%, City of Tshwane at 9.8% and City of Cape Town at 7.5%.

But Durban’s office stock has increased.

“Durban’s office market has seen an 8% increase in stock, largely driven by a change in building use from residential to office. Increased stock in the CBD and the Umhlanga region has been the main driver of the overall office stock increase in eThekwini, which saw a 7% stock increase in the first quarter of 2017.”

These factors contributed to eThekwini’s average vacancy rate increasing by 2% which the report says is also due to vacancy rate escalations in areas such as Westville with its rate of 6.1% and Hillcrest with 3.6%.

The Umhlanga region saw a 2.5% increase in vacancies, but this is “most likely due” to speculative developments coming into the market rather than tenants moving out of office accommodation, which is the case in the Westville and Hillcrest area.

Regeneration projects like Propertuity’s Ambassador House in the Durban CBD are seeing an increased supply of prime office space in the city. Picture: Propertuity

Berea was the only node to show decreasing vacancies, with vacancies declining from 14.4% in the first quarter of last year to 9.5% in the same period this year.

Comparing Durban’s office accommodation market with other main cities, Rode & Associates’ report on the state of the property market in the first quarter of 2017 says office rentals in Cape Town decentralised, showing the strongest growth, benefiting from low vacancy rates in the city’s top suburban office nodes.

In the first quarter of 2017, nominal market rentals in Cape Town decentralised nodes showed growth of 7%, slightly in excess of the expected growth in building-cost inflation of 6%.

“Cape Town decentralised was followed by Durban and Pretoria decentralised, where rentals were up by 6% and 2% respectively. The weakest performance came from Johannesburg decentralised, where rentals on average remained at roughly their previous-year levels.”

But despite the high vacancy rates, prime office accommodation continued to outperform other asset classes, achieving the highest rental growth of 7.8%, while older grade B accommodation saw a 3.8% increase in rental rates.

“Grade A office stock, on the other hand, has maintained asking rentals at an average of R119/m². Currently, the Umhlanga region continues to fetch the highest rental rates with asking rentals even reaching R240/m² in some developments.”

As at the second quarter of 2017, the South African Property Owners Association (Sapoa) says the national office vacancy rate was 11.8%, the highest level since 2005. Asking rental growth also slowed over the past year and was at 4.1% year-on-year, a similar level to the 2002 vacancy peak.

“A significant factor driving the excess supply prevalent in the market is the amount of space ‘left behind’ by large corporates consolidating multiple real estate tenancies into single, newly-built, large-scale campuses.

“This backfill risk has already contributed to increased vacancy rates in certain nodes with the potential for more as several large development projects come on line in the short term,” Sapoa says in its Q2 Office Vacancy Report.

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