eThekwini, covering Durban and its surrounding areas, is one of the 11 districts of KwaZulu-Natal. For the office market in this district to see a sustainable comeback, will require robust economic growth and renewed investor confidence in corporate South Africa.
This is according to the JLL eThekwini Real Estate Market Q4 2020 report, which reveals that in the short-term, the repurposing of vacant office space and the decline in development activity will likely see pressure easing to an extent.
Premium offices hit by high vacancy rates
Premium offices, mostly located in Umhlanga, La Lucia and Ballito, saw vacancy rates reach a high of 24.7%, from 3.5% in the same period in 2017. During the fourth quarters of 2018 and 2019, vacancy rates were over 22%.
Michael Scott, JLL Sub-Saharan Africa research analyst, explains that Umhlanga accounts for 73% of premium offices, with the rest split between La Lucia (18%) and Ballito (9%).
Median gross asking rentals for these offices reached R182/m2 by the fourth quarter of 2020.
“Rents are currently over-priced (long-term leases with escalations near maturity have artificially inflated market rentals), however, negative reversionary corrections (30%+ contractions in real rentals taking place during renewals, and renegotiations) are considered necessary if sustainable pricing levels are to be achieved,” says Scott.
According to Ian Lambie, director at Lambie Spark & Associates, many large corporates continue to work remotely and have not decided on any new working model such as hybrid – work from office, home or remote.
Others opt to pay to be released from their rental obligations, some try to sublet the space they are not using, with very few enquiries for office space at the moment.
“We have yet to see the full impact of corporate SA’s decision on future working space needs. I think the end result will be that landlords will be discounting rental levels to keep tenants in the same space/slightly smaller space so as not to lose the relationship and/or cash flow,” says Lambie.
He points out that the office market is going through tough trading conditions with competitive terms of lease agreements on offer, as landlords want to retain good tenants at all costs.
Where demand would come from this year
According to JLL, the office market in eThekwini was under pressure throughout 2020 with all grades experiencing vacancy rate increases.
Currently, office enquiries are mostly for smaller spaces measuring between 120m2-150m2, possibly because many tenants are downsizing.
Lambie says for now, demand for office space is coming from the business process outsourcing industry such as contact centres.
However, these enquiries demand serviced infrastructure spaces, and not all office blocks can, or are willing to accommodate this type of business.
Scott explains that demand for traditional office space is likely to remain flat over the medium-term. “We anticipate a shift in focus towards alternative use of office space, re-purposing like smaller serviced office space, mixed-use retail, residential conversions, recreational and institutional use, for example.”
JLL anticipates that conversions from office to residential, and student accommodation especially, will start picking up momentum at appropriate price levels. These conversions have been successful in areas such as Umhlanga and Ballito.
Key nodes like Umhlanga are already well supplied, particularly landlords of B- and C-grade office spaces who are battling to attract and retain the right tenants, notes Scott.
According to the JLL report, local flexible office space operators have struggled through the Covid-19 pandemic, with most of their market including small independent businesses.
The report reveals that due to their small operations, many businesses have primarily been working from home, while very few flexible office operators are doing exceptionally well, and take-up is expected to be slow.
Lambie and Scott say operators like Flexible Workspace 8MS are no longer in operation, The Workspace Ballito, measuring approximately 1 200m2, is struggling to attract tenants, whereas The Workstation in Umhlali (nearly 1 200m2) is very popular among local businesses.
Small operators include Treehouse Workspace in Umhlanga (<500m2), XtraSpace Flexi Offices Durban Central, Open Plan Studio, and BizFarm in Musgrave.
Other operators represented in the area include Regus, an International Workplace Group (IWG) brand, which occupies roughly1 000m2 in Umhlanga and about the same size in Durban CBD, Flexible Workspace Durban (800m2), Flexible Workspace Umhlanga (around 1 000m2) in Umhlanga, and Spaces under IWG brand with 3 000m2 in Umhlanga.
WeWork is not yet represented in KwaZulu-Natal. They say Regus and Spaces under IWG brand are the only international operators they know of that operate in KwaZulu-Natal at this moment.
“The flexible workspace is likely to become more popular with office users as economic activity improves,” they say.
Lambie adds that flexible office facilities in eThekwini are estimated to be less than 15 000m2 of the total flexible/co-working office spaces between Durban and Ballito.
Edited by Gudrun Kaiser