Office vacancies have dropped as landlords taken in less
The national office vacancy rate has seen a slight improvement, but this has come at the expense of asking rentals.
The vacancy rate, according to the SA Property Owners Association’s (Sapoa) 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 increase from 1.4 million square metres to two million 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 75000 new office-based jobs – an increase of 6.7%, which is no mean feat considering current economic growth forecasts.”
When assessing the office market in term of vacancies, Gregg Huntingford, chief executive of Spire, says it is a tough market, 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. One has to get out and talk to tenants to see what they need, even more so now than in years before.”
Broll divisional director Frank Reardon says the market is tough across the board, though 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,” he says.
Many landlords have had to drop asking rents, with this reduction amount 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 development come on stream, such as Sandton, have seen more aggressive discounting than other nodes.
“The decentralised nodes in Durban have fared pretty well to date, but few nodes have seen real rises in rents.”
Rents are 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 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.”
Huntingford says it is important to remember 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 to keep vacancies down.
“Tenants need to refurbish their premises, but in a flat economy cannot always afford to do so.
“The landlord can provide the upfront payment for the tenant and thereafter recover this over the term of a lease over and above the rent.”
Many landlords have also had to upgrade buildings to make them more appealing to tenants, Reardon says.
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 is they should not need to operate in these current conditions forever.
“Hang in there,” Reardon advises.
“Anecdotally it seems vacancies are at their worst and offices are close to or at the bottom of the cycle.”