Sandton in Johannesburg, which represents 21% of the Growthpoint Properties Office GLA, recorded vacancies of 25% at the end of June 2021.
Growthpoint says that within Sandton, several distinct nodes with very different dynamics and some located close to the Gautrain station, are performing better than others.
“We are seeing that micro-location and node selection play an increasingly important role in our portfolio composition,” says Paul Kollenberg, Head of Asset Management: Offices, at Growthpoint Properties.
Kollenberg explains that the Sandton region, which includes Sandton, Chislehurston, Wierda Valley and Sandown, represents 21% of the Growthpoint Office GLA, measuring approximately 364,000m2 across 37 buildings.
In the annual results presentation for the period ended 30 June 2021, Growthpoint Properties revealed that nationally, total office vacancies increased to 19.9%, from 15.4% for the full year in 2020.
Furthermore, 48,000m² of lease terminations during the reporting period impacted vacancies. A third of this was legal action taken against tenants and business failures, whereas another third comprised paying cancellation fees to reduce or vacate space.
“For the greater Sandton area, we had lease terminations of about 15,000m2. We obtained cancellation payments for about half of this area, with only about 20% (3,000m2) relating to non-performance by tenants,” says Kollenberg.
Sandton office market trends
According to Garrick Faul, Director at Megatrend Properties, the sentiment toward having office premises in Sandton has slowed over the past few years. “However, the node continues to be South Africa’s primary office location and is expected to hold value in the long-term.”
Faul explains that a significant portion of stock in Sandton is prime grade offices, to which many companies relocated towards the end of 2017 and early-2018.
This resulted in A- and B-grade offices becoming vacant. “Recent remote working trends have driven many companies in P-grade offices to downsize and look for sub-let opportunities, thus bringing further stock and occupier opportunities into the market.”
Additionally, Faul says that due to the scale of vacant stock, coupled with an increase in tenants wishing to downsize, deals are taking longer to close. Landlords and occupiers are exploring creative solutions to their real estate projects.
Within this area, most of the office demand is focused on properties within walking distance from the Sandton Gautrain station.
“Although demand for space is still relatively positive in the node, required office sizes have declined, as tenants are trying to downsize and reduce overheads under current economic pressures. The majority of demand is still for P-grade office space, and partly for serviced and pay-as-you-use office spaces,” points out Faul.
Sandton represents 1.9 million m² of office space, and the total vacant space is currently estimated to be around 300,000m². This excludes sub-let opportunities from existing corporate occupiers, he points out.
Moreover, Faul says that Covid-19 has unquestionably placed further pressure on the commercial office market, and not just in Sandton.
“Vacancies have increased year-on-year (y/y). The rollout of vaccines, and the return to office over the coming months will provide better evidence of the impacts over the past 12 to 18 months and the future of the Sandton office market,” says Faul.
Innovative ways to mop up vacancies
Faul explains that with the increased vacancy pressures, landlords are offering a variety of incentives to attract corporate occupiers. These include reduced rental, fit-out allowances and/or rent-free periods.
To this end, Growthpoint has come up with helpful tools such as the SmartStay and SmartMove initiatives to retain and attract tenants.
Kollenberg explains that their new SmartStay incentive programme rewards all loyal existing tenants on lease renewal. The established SmartMove initiative offers up to 125% of the first year’s rental in allowances back, for a specific portfolio that includes 38 high-quality buildings in Johannesburg and Cape Town.
The benefits of these initiatives include free rental periods, zero escalation for the lease period and contributions to office fit-out and relocation costs.
“We have also developed an offering for clients who are looking for a flexible, short-term lease deal, with three-to-18-month lease options on select buildings in the Gauteng and KwaZulu-Natal regions.
In addition, we offer Undeposit for all qualifying tenants – this is an option that replaces the requirement for a deposit with a much reduced once-off fee,” says Kollenberg.
Sandton office rentals
Kollenberg explains that rentals vary, depending on the quality and age of the building.
Location within the area also plays a part in determining rental. “On our vacant space, we are marketing gross rentals that range from R105/m2 to R220/m2.”
He says that average rental escalations are 7.4% on the Growthpoint office portfolio. Escalations achieved on new deals and renewals averaged 7.32% for the financial year to 30 June 2021.
Faul points out that currently, rentals have been more volatile, with landlords using this as an incentive to attract tenants.
Gross rentals range from R100/m2 to R145/m2 for B-grade offices, R150/m2 to R200/m2 for A-grade, and R220/m2 to R270/m2 for P-grade offices.
Deal sizes vary widely, especially in the broader Sandton node. There has been stability on larger occupier needs over the past couple of years for offices measuring ±5,000m². A number of deals have been concluded over the past 12 months for spaces measuring between 1,500m2 and 2,500m², notes Faul.
“In Sandton, escalations vary significantly, depending on lease length, tenant covenant and capital investments, among other factors. As a broad framework, 6.5% to 8.5% rental escalations are still being achieved,” he adds.
Edited by Gudrun Kaiser