North or south, office vacancies remain high, landlords are under pressure to adapt and survive and tenants are becoming pickier.

Office markets in both Cape Town and Johannesburg are taking strain despite good economic growth since 4th quarter (Q4) 2009.

David Reid of JHI's broking division in Gauteng, says top commercial Johannesburg nodes are feeling the pinch as evidenced by office vacancies which remain high.

“A contradicting trend is developing whereby further office development is underway while supply is already very high. This is mainly around infrastructural developments such as roads, the Gautrain, the Bus Rapid Transit System (BRT) and other enormous capital upgrades to our otherwise ageing infrastructure. This is most evident in the north of Johannesburg and also in the Pretoria CBD.”

“Office tenants are also quite selective with lease renewals as there is more variety on the market. The range of rentals is also much better and gives them far more options.”

“As a result, landlords are trying hard to retain their tenants with lower rentals. There is a lot of downward adjustment in the market due to pressure on historically high rentals.

“But this will not be permanent as the construction costs of new office developments drive rentals up again. This will occur in the next three to five years.”

Reid says yields in Johannesburg are generally under pressure due to high vacancy rates while some areas are outperforming others. “Places like Illovo still achieve rentals of R125 per sqm, Sandton is doing fairly well, Rosebank is emerging as a strong node while there is growing demand for sectional title properties in Bryanston.

“A badly performing area is Randburg where a slightly ageing CBD is driving office tenants away.

“The CBDs continue to present opportunities to developers and investors with their Inner City Rebates as well as Government demand for office space, but even here there are signs of space oversupply, predominantly in the private sector. Large corporates expanded vigorously at one stage and now have much more space available after retrenching large numbers of people due to the recessionary conditions.”

In Cape Town, the picture is also still very much a grim one.

Dave Russell, a director of Baker Street Properties, says the first SAPOA Office Vacancy Survey for 2010 confirms that the Cape Town office market has not escaped the sluggish economic conditions experienced in South Africa.

“Five of the seven office nodes surveyed have experienced increases in vacancies in the past 12 months. While this is not good news for landlords, it has created some attractive opportunities for office tenants, who are in a position to take advantage of present market conditions.”

Russell says the most significant change has occurred in the Cape Town CBD figures, where a combined vacancy, including Premier, A and B grade buildings, seen at 5,4% a year ago, has now reached 9,1%. “This increase is largely attributable to a substantial refurbished office block coming onto the market, along with the relocation of certain large tenants to locations such as The Boulevard and Century City.”

In the northern suburbs, Bellville has seen a small increase to 6,2% compared to 5,3% last year, but Century City has been one of the nodes experiencing a reduction in vacancies, where they have moved from 14,6% down to 11,9% today.

In the southern suburbs, Claremont has now reached 16,6% compared to 14,5% this time last year and the Rondebosch/Newlands node is now at 4,8% compared to 2,7% last year. Pinelands has increased from 2,3% to 5,2% and the V&A Waterfront presently has a vacancy of 2,9%.

“Against this background of increasing vacancies, we have experienced a noticeable increase in enquiries from office tenants, who are taking a positive approach to market conditions. Many companies who shelved their expansion or relocation plans a year ago are now coming to the market, taking advantage of the concessions currently offered by landlords.

“New developments coming on stream are often the main contributing factor to increasing vacancies. However, with no significant speculative office development taking place in Cape Town, it is only a matter of time before this upward trend in vacancies is reversed. Once that happens rentals will again start to increase.”

However, news about the office sector isn’t all negative.

Marius Basson, Western Cape regional director for JHI, says the Soccer World Cup is causing a short-term requirement for office accommodation in Cape Town from role players in this event. “And this may ultimately result in them taking up a more permanent tenure.”

"Locations in Greenpoint in the vicinity of the stadium, including vibrant De Waterkant, are the most popular in this regard."

He says a new trend which has emerged is toward lower rise buildings of up to five storeys, in a secure and appealing office park environment, as opposed to skyscrapers.

"Today's young entrepreneurs and professionals prefer this kind of environment, including trendy, designer buildings with ample natural light. In addition, women nowadays form a greater part of the workforce than previously and to many a safe, trendy and modern working environment – which may include retail – carries a great deal of weight. The success of Century City in Cape Town's northern suburbs is proof of this.

He says understandably, given the economic scenario, there's also a move towards smaller floor spaces of around 300 or 400sqm rather than the traditional 1,000sqm floor space of former years.

"A further boost for Cape Town is the upgrade of the city's infrastructural developments such as the BRT (Bus Rapid Transport) routes, Cape Town International Airport, public roads and the Cape Town Station.” – Eugene Brink

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