Vacant office space pressure landlords

The number of To Let signs outside vacant or partially vacant buildings is a reflection of growing desperation on the part of landlords says analyst

In an effort to let space and reduce nagging vacancies, landlords are being forced to be more liberal with broker commissions, tenant installation allowances and rent-free periods.

Office vacancies are rising in SA’s cities as the economy struggles to start humming again, and a recovery is not expected soon.

While most of the increases in vacancy rates are marginal, they confirm a trend that should concern landlords and developers.

According to South African Property Owners Association-IPD (Investment Property Databank) research for the fourth quarter of last year, national office vacancies increased to 10,4% from 10,2% in the third quarter.

Across the country, P-grade space, which is top-quality, modern property, and A-grade space, property not older than 15 years, are performing much better than lower-grade stock.

The A-grade office vacancy rate is 8,5% and P-grade offices have a vacancy rate of below 3%.

Should the rising vacancy rate trend continue, it is expected to damp rental-income prospects and affect valuation rates.

Stanlib property funds head Keillen Ndlovu said yesterday that the number of To Let signs on Rivonia Road had to be seen to be believed. "Here you can easily find two to three big To Let signs outside each of the vacant or partially vacant buildings. This is a reflection of desperation," he said.

The oversupply of office space in the past few years was a result of liquidations of small companies, he said.

The higher the vacancies, the lower the rental income, which leads to a lower property valuation. Mr Ndlovu said vacancies were a cost to landlords due to the opportunity cost of sitting with a vacant or partially let building.

"Higher vacancies mean landlords are paying rates even for vacant space. They are also paying for services like security, gardening, not to mention paying for interest costs if the property is funded with debt without full rental income," he said.

Meago asset manager Thabo Ramushu said office sector recovery would depend largely on the growth in employment in the financial services sector.

"Demand is expected to emanate for the A-grade market with B-and C-grade space likely to suffer further. Decentralised office nodes are expected to show the best growth potential, while central business districts are likely to suffer further," he said.

Mr Ramushu said the industrial market was expected to continue to perform well with minimal vacancies, which fell to 4,2% by year-end.

"However, the smaller and mid-tier industrial units are taking longer to fill up, while the big box, logistic space outlook remains optimistic with limited supply as the underpin," he said.

"Optimism in the building industry remains weak with low levels of building plans passed. Speculative development will remain subdued and should be supportive of the absorption of vacancies," Mr Ramushu said.