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SA’s embattled office space market plagued by escalating vacancies

13 Aug 2019

Property News

Brought to you by Property24

By Jonathan Turner

With business and investor confidence hitting new lows, the local property sector has taken a desperate nosedive.

Testament to the prevailing economic uncertainty and investor pullback, Sandton is reportedly experiencing its highest ever vacancy rate at 17.6%. Image source: Shutterstock.com

The rapid downward trajectory is shockingly visible in the moribund office space market, which is suffering from high vacancies across the country’s four economic hubs. While Cape Town has at least enjoyed a degree of buoyancy in certain areas, Johannesburg, Durban and Pretoria are in dire need of renewed investment activity as they battle against high vacancies and protracted rental pressure.

The current negative trends in commercial property can arguably be attributed to the high levels of political and economic uncertainty, with investors and business leaders preferring to hold back on long-term commitments while the country remains in a fragile position.

The very soft nature of the commercial property markets in South Africa provides occupiers with the ideal opportunity to reappraise their portfolios. That includes the ability to inject more flexibility into their lease commitments and to enhance the optimisation of space use through improved workplace strategies and employee experience.

Landlords not only need to be realistic on pricing, but also to offer alternative solutions to occupiers. These could include flex space options and the ability to expand and contract with the ebb and flow of the business.

Let’s take a closer look at the major factors impacting office space across the country…

Sandton hits record high vacancy rate

In Johannesburg, the current office space vacancy rate is sitting at 12.2%. Testament to the prevailing economic uncertainty and investor pullback, Sandton is reportedly experiencing its highest ever vacancy rate at 17.6% - worsening from the previous quarter.

Looking ahead, there are various developments in the pipeline (estimated at 398 000m²) in key nodes such as Sandton, Rosebank and Waterfall. The majority of these projects are speculative, which when completed will add pressure on existing vacancies.

Talent retention drives demand in Cape 

The commercial property market in Cape Town has been in a recovery phase for some time, and demand for office space is expected to be stable with no major take up expected.

That said, there has been some encouraging demand amongst financial institutions and technology companies, with the emphasis on proximity to transport infrastructure and other live-work-play amenities. Nodes such as Cape Town CBD, V&A Waterfront and Century City are attracting activity and investment. Notably, companies are seeking office space that provides secure, vibrant and engaging environments for staff with the aim of attracting and retaining top talent. The next 12 to 24 months should welcome new projects, especially in the CBD, Century City and Tygervalley.

Durban in the doldrums

The commercial property sphere in Durban is currently characterised by low demand from large occupiers, oversupply of stock and flat rental growth. Office take-up activity is mainly prevalent in the Umhlanga area, with the majority of occupiers preferring the node due to its modern buildings with secure and attractively landscaped environments - as well as good infrastructure and the recently upgraded transport link. Overall, however, the outlook is bleak: Durban’s vacancies are high, reaching 13.5% in Q1 2019.

Pretoria reflective of the nation’s fragility

As a regional centre for many national occupiers, Pretoria is bearing the brunt of SA’s sluggish economic growth and stifled investment activity. The vacancy rate is sitting at 8.9%, with office supply outstripping demand. This is because many large blue-chip tenants are consolidating and downsizing. Pretoria East is the only node with relatively good activity while older nodes are struggling to attract occupiers.

Today, Pretoria’s demand is largely fuelled by government, technology and state-owned company occupiers – with many currently improving the quality of space, particularly for Grade A office accommodation. This is resulting in increasing vacancies and putting further pressure on lower grade office rents.

Forecast: more of the same

There can be no doubt that South Africa’s office space market has been severely stifled by a stagnant economy. Moreover, the spate of load shedding earlier this year by the state’s power company, Eskom, has created panic among investors. As a result, the anticipated commitment to inject further capital into commercial property projects has been subdued.

This is unlikely to change in the short term, particularly with job losses intensifying. In Q1 2019, over 94 000 jobs were lost in the financial sector alone. The office sector and other related sectors are in desperate need of renewed investment activity, which would ultimately drive occupier demand.

About the Author
Jonathan Turner

Jonathan Turner

MD of Advistory & Transaction Services Africa at CBRE Excellerate

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