THE EMPTY OFFICE
SA landlords left to sweat on the future of working spaces
Companies are increasingly reassessing and reducing their office space needs because they are embracing a mix of in-person and remote working arrangements. And this has resulted in many offices standing empty.
The office is open again. Many companies have reopened spaces on a voluntary basis and have called their workers back to the office after nearly two years of the work-from-home experiment, necessitated by the Covid-19 pandemic.
However, the new challenge for office owners/landlords is convincing more people to use the office and for companies to renew their leases at attractive rental rates when they expire.
Companies are increasingly reassessing and reducing their office space needs because they are embracing a mix of in-person and remote working arrangements. And this has resulted in many offices across South Africa, especially in commercial hubs, remaining half-empty.
Data from the South African Property Owners Association showed that office property vacancies (space left partially or fully unoccupied) climbed to 16% in the fourth quarter of 2021, which is about a percentage point above the previous record in 2003. Put differently, vacancy rates have hit levels last seen in 2003.
A look at business nodes across South Africa paints a worrying picture.
A quarterly report by property analytics firm Rode & Associates titled State of the Property Market shows that cities such as Johannesburg and Cape Town were leading with vacancy rates in the past three months of 2021, averaging at 19.8% and 16.7% respectively.
In Johannesburg’s Sandton, which is South Africa’s main business node, office vacancies rose to a record 22.5% in the fourth quarter of 2021, up from 17% before the onset of the pandemic. Similar trends have been seen in Rosebank, Randburg, Parktown and Rivonia. In Cape Town, vacancy rates in the CBD and Century City have doubled from about 10% to 20%, over the same period.
More pain for office landlords
Kobus Lamprecht, the author of the Rode report, says the work-from-home trend has been a “killer blow” for the office property sector and its impact will continue to be felt over the next few years. This is because companies are expected to vacate their business premises or reduce their office spaces as leases come up for renewal. Leases for office properties typically run for three to five years.
Making matters worse is that there is an oversupply of office properties, as new buildings were completed by developers in recent years in business nodes such as Sandton, Midrand’s Waterfall City and others. “The large and growing amount of available space means tenants are spoilt for choice and clinching eye-popping deals,” says Lamprecht.
The glut in office space is leading to a decrease in rental rates, especially for A-grade buildings that are not older than 15 years and have had renovations in recent years. Rental rates for A-grade buildings fell by 4.2% in the fourth quarter of 2021 compared with the same period in 2020, according to the Rode report.
In some instances, office property tenants have been deliberately negotiating new leases or renewals at lower rental rates, taking advantage of desperate landlords who want to have their buildings occupied. Having an empty office building is costly for landlords, as they are required to pay utility costs linked to the building even though they don’t receive a rental income.
More property owners are taking a dim view of the office property sector’s outlook.
SA Corporate Real Estate Limited (SA Corp), a JSE-listed property company, plans to completely exit the office property sector in South Africa by selling its buildings. Less than 2% of its property investments worth about R15-billion comprise office buildings.
SA Corp CEO Rory Mackey says South Africa’s negative economic outlook and last year’s major job losses also suggest less office space will be needed, making the company nervous about future investments into the office property market. “The economic growth required for the take-up of office space [in order for] office vacancy [rates to dissipate] to an appropriate level for this to be a sector to invest in is not foreseen in the short to medium term,” he told DM168.
Rising vacancies or empty office buildings will require landlords to be creative to attract new tenants or retain old ones. Instead of offering tenants rental payment holidays or free parking at office buildings, or waiving rental deposits, landlords can be creative by offering amenities such as coffee shops and free gym facilities for tenants, and installing rooftop bars for after-work drinks.
Stanlib’s property team proposes that empty office spaces be repurposed into apartments, flexible working spaces, small shopping malls, schools, hospitals, daycare clinics, boutique hotels and art exhibition centres.
“We have seen some buildings in Sandton, Melrose Arch and Rivonia being converted from offices to residential. This helps to bring people closer to work and saves them from long commutes. As residential exposure picks up, this creates a need for small grocery stores, coffee shops, laundromats as well as self-storage,” says Stanlib in a research note. DM168
This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Woolworths, Exclusive Books and airport bookstores. For your nearest stockist, please click here.