Office vacancies remain stubbornly high

Demand for commercial office space remains poor as companies cut back on costs.

The economy weakness is exerting a toll on commercial property owners, as a rising glut of office buildings makes it more difficult for some owners to lease the empty spaces.

Demand for commercial office space remains poor as companies cut back on costs.  

“Office landlords are taking desperate measures to attract tenants as they struggle with vacancies," said Ortneil Kutama, SA Commercial Prop News Media Director.

Some multinationals have moved into new premium (P-grade) offices and left older A-and B-grade offices vacant.

“Owners of these offices are struggling to find tenants that can occupy these buildings. When they do, tenants have been unwilling to pay rentals similar to those they vacated," says Kutama.

The office market will turn the corner only when the economy starts growing at 3%, an accomplishment last achieved in 2011.

Offices have been the worst performer among traditional property types, including retail and industrial, for a number of years as they struggle to shake off a stubborn vacancy rate of about 11%.

New York-listed MSCI’s IPD property statistics have retail vacancies around 4% and industrial vacancies at  about 3%. 

Craig Smith, head of research and property at Anchor Stockbrokers, said most new office space over the next two years would be new-builds in premium nodes.

Anchor Stockbrokers is a wholly owned subsidiary of the JSE-listed wealth manager, Anchor Group, which has a market capitalisation of about R708m and assets under management of about R36bn. A transaction, which will see a consortium led by property developer Sisa Ngebulana buy a 51% stake in Anchor Stockbrokers, is expected to be completed in early 2019. 

Offices are largely driven by economic growth, which has been tepid in SA for years. The economy officially exited the recession after reporting surprising 2.2% GDP growth for the third quarter of 2018. But a survey of economists by Bloomberg has forecast real economic growth of only 0.7% in 2018, 1.5% in 2019 and 1.9% in 2020.  

“It’s too early to tell if the recovery has begun. The national vacancy rate is still stubbornly high. One would need to see a fairly consistent reduction in vacancies and subsequent growth in market rents in real terms. This will require real GDP growth in excess of 2.5% to 3% on a sustainable basis of more than a year,” Smith said.

Conversion of office stock to alternative uses such as student housing, residential and self-storage  would help contain vacancies, but economic growth  was required to have a meaningful  effect in reducing vacancies, he said. 

As much as 106,420m² of space will come onto the market in 2019 and in early 2020 into high-end nodes,including Waterfall, Sandton and Rosebank, a report released on Wednesday by Anchor Stockbrokers showed.

This new premium grade office space suggests that some confidence is finally returning to the commercial market while office vacancies remain stubborn. The national office vacancy rate was 11.2% at the end of third quarter of 2018 according to the South African Property Owners’ Association. 

The Johannesburg office vacancy rate was at 12.8%, ahead of eThekwini's 12.1%, meaning it had the highest vacancy rate among SA’s five largest metropolitan municipalities for the first time since 2003 when it hit 17.1%. Cape Town had the lowest vacancy rate with 7.2%. 

Pranita Daya, an analyst at Anchor, said while there was oversupply in the office market, there was still strong demand for P-grade offices in top nodes, where most upcoming developments were located. 

According to Sapoa’s official definitions, a P-grade office is a “top-quality, modern space which is generally a pace setter in establishing rentals”.