Office sector market trends

“The office as an experience offers users a structured, creative and collaborative environment,” says John Jack, Galetti Corporate Real Estate CEO.

John Jack

“In 2021, companies are rethinking the office and are using it as a much-needed catalyst for productivity, efficiency and safe collaboration.”

Jack notes that a hybrid/rotational occupancy strategy is sought after within the sector at the moment. “This has been put in place by the majority of companies and remains the most popular way to safely return to work. The model sees employees coming into the office for periods of time on specific days,” Jack says.

According to Jack, another trend that could increase demand for office space is socially distanced workstations. “If this becomes a popular avenue for employers, especially large corporates, it could drive companies to expand their office footprint in future.”

“Opting for socially distanced workstations could require a larger floorplan and will see a net increase in office demand if this trend continues.”

Modular offices – stand-alone temporary structures – are ideal for those occupying their own sanitised space, as opposed to open plan offices.

South African office properties here to stay

Rising vacancy rates

The Rode Report Q2 2021 shows that vacancies are high, with a rising number of empty offices with national decentralised vacancy rates nearing 14%.

As a result of oversupply, tenants have the upper hand in lease negotiations. They are able to negotiate benefits such as longer rent‐free periods and much lower rentals.

Image by Austin Distel

During the first quarter of 2021, the percentage of workers who worked from home in South Africa reached 7%, from a 17% peak in Q2 2020 during strict lockdown, according to Stats SA data. However, this was before the third wave hit South Africa in June.

Working from home is to blame for rising office vacancy rates, according to the FNB Commercial Property Broker Survey Q2 2021.

Commercial brokers surveyed, point to a surge in working from home during lockdown, but also, investors waiting to see what the Covid-19 impact is on the economy.

Over 10% of investors say that the office market is dead, with 7.94% pointing to economic fallout of business – factors that lead to a dampening of office space demand.

The survey notes that 58.73% of brokers perceive companies to be re-evaluating their space needs, in some instances downsizing to smaller spaces.

According to Frank Reardon, director at Strategic Property Solutions, the Durban and KwaZulu-Natal office sector, like many locations, is feeling the pressure.

Rental declines and increases in vacancy rates will probably not be as marked as they are in Cape Town and Johannesburg where there is greater speculative office development historically, which creates more acute oversupply.

“In Durban, there is a far smaller proportion of large corporate head offices than in Cape Town and Johannesburg. Most office developments were designed to be multi-tenanted and meet the requirements of the smaller size tenants, so they are better equipped to handle downsizing from existing tenants.”

Reardon states that the large proportion of smaller businesses, as opposed to corporate offices, means additional resilience when compared to Cape Town and Gauteng.

Durban is dominated by Business Process Outsourcing/call centre businesses that are also looking at lower densities and remote working solutions to optimise operations during these difficult times.

Reardon believes that working from home is a lasting feature of the pandemic. It affects all tenants/businesses, but more so those that have strict work-from-home protocols, including professionals, banks/financial institutions and government.

Premium offices in eThekwini have record-high vacancies

Jack observes that in the last few years, the industry has been under major pressure with many companies downscaling or opting to renew rather than relocate.

Frank Reardon

Additionally, landlord incentives to attract and retain tenants had the industry battling it out and losing significant margins. “We saw companies renewing rentals at 20 to 30% discounts,” he points out.

Jack says they anticipate excess supply and significantly lowered rental rates to plague the office sector for the next two to five years. Luckily, industry players are realising the need to ‘get creative’.

For example, Galetti recently found a five-year lease for the iconic Media24 building in Cape Town by looking for efficiencies across the company’s portfolio. “We found that we could consolidate Media24 into a smaller footprint in the building, enabling us to work with several companies to find a suitable sub-tenant. This creative use of office space is a win-win for both tenants and landlords, and will become a major trend as the year continues,” says Jack.

Employment and demand for property

John Loos, FNB property strategist points out that the Gross Value Added (GVA) of the finance, real estate and business services (FREBS) sector recorded a negative growth of –5.3% in the first quarter of 2021. FREBS is a key influence on office property performance.

“While the GVA of the latter sector influences tenant performance in the sector, it is more the employment trends in the FREBS sector that influence the demand for office space,” says Loos.

By Q4 2020, the FREBS sector’s employment numbers fell sharply by –7.58% year-on-year.

According to Jack, businesses ultimately drive the demand for property. “Our role as businesses is to create employment and grow bigger sustainable businesses that will provide a future for the people of our country. Reinventing and reinvigorating our economy is something that everyone should be assiduously committed to,” he adds.

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Edited by Gudrun Kaiser

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Safrea or its members.

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