Search Property For Sale

Good and bad news for commercial property owners

Google+ Pinterest LinkedIn Tumblr +

Office space vacancies have dropped slightly – but so have rents

The national office vacancy rate has seen a slight improvement but this has come at the expense of rents.

The vacancy rate, according to Sapoa’s latest Office Vacancy Report, was 11% as at Q3 of 2019 – a 0.3% improvement from the previous quarter.

However, asking rental growth has declined by 1% year-on-year.

“This 30 basis point improvement in the sector’s overall vacancy rate puts us back at the level of Q1 2019, reinforcing the sideways trend that has been in place for the better part of five years,” the report says.

Since March 2011, the total office vacancy rate – including unlet new developments, “has not shifted substantially”. The amount of stock created in this period saw the amount of available gross lettable area space increase from 1.4million square metres to 2million square metres.

“Assuming a generous 15m² per employee, 40000 jobs are needed to fill the 600000m² of additional vacant office space,” Sapoa says. “To get back down to a 5% vacancy rate will require at least 75 000 new office-based jobs – an increase of 6.7% – which is no mean feat considering     

considering current economic growth forecasts.” Gregg Huntingford, chief executive of Spire, says the office market is a tough one and there is “a lot of stock”, largely due to development. However, properties in strong nodes still see high demand.

“There has been a lot of development but as this suits only certain tenants, good solid stock at good prices remains attractive. But one has to go out and talk to tenants and see what they need, even more so now than in years before.” Echoing this, Broll divisional director Frank Reardon says the market is tough across the board, although much depends on location and other factors.

“Changing global workplace trends that entail more efficient use of space, and more flexible work environments, have dovetailed with an economy that has gone sideways to put additional pressure on property owners.” Many landlords have had to drop their asking rents, with this reduction heavily dependent on the location and desirability of their buildings.

While vacancies are up in most nodes, Reardon says those that have seen a glut of new development come on stream – such as Sandton in Joburg – have seen more aggressive discounting than other nodes. “Decentralised nodes in Durban have fared pretty well to date but few nodes have seen real rises in rents.”

However, rent is not the only discussion point, Huntingford says. “Often tenants can afford the rents but bigger discussions occur around aiding with fit-outs and commencement dates.

Where reversions are necessary, the parties tend to work together so that these are softened for all, so a reversion may be muted or flat and then an escalation a little softer… “Property deals are a marriage of sorts, so everyone has to come to the table.”

It is important to remember that landlords still have to maintain their buildings in a cost-inflationary environment for some key services. In addition to rental discounts or compromises, and maintaining their buildings well, landlords have also been helping tenants reduce electricity and water costs or consumption. 

This is in order to keep vacancies down. “Tenants need to refurbish their premises but in a flat economy cannot always afford to do so. The landlord can help here by providing the up-front payment for the tenant and thereafter recovering this over the term of a lease over and above a rent.”

Many landlords have also had to upgrade their buildings to make them more appealing to tenants, Reardon adds. Often these measures include providing back-up power supply; making security upgrades; installing green building measures to reduce utilities consumption costs; offering rent-free periods and increased tenant installation allowances and adding amenities such as coffee shops, gyms, and concierge services.

The good news for landlords, though, is that they should not need to operate in these current conditions forever. “Hang in there,” Reardon advises. 

“Anecdotally, it seems as if vacancies are at their worst and offices are close to, or at the bottom of, the cycle.”

As property tends to be cyclical, Huntingford says: “We are in the valley of that cycle and indications are that it will be that way for a while yet. But we have been here before and probably will be again. The bottom line is that good fundamentals need to apply.”

These include a good rent that allows the landlord to provide a good service and the landlord supplying such a service. “Relationships are key. Keeping an open channel of communication with tenants is vital,” he says.


About Author