A Work in Progress
Candace King, Property Developer, May 2014
The office sector in South Africa may still be lagging – but the segment is being driven by a growing demand for quality and prime space.
To date major trends in the office sector include a big drive to more green and efficient buildings in order to reduce carbon emissions, save on electricity and water costs and to create a more pleasant working environment: landlords using creative pricing methods, incentives for brokers and tenants to fill up their buildings; tenants who are more conscious of the all-in cost of occupation, thus putting pressure on the net rentals; tenants demanding more flexible spaces and continuing to reduce the average space occupied per employee; shorter leases being signed by smaller tenants because of the uncertain economic environment; and larger tenants locking in lower rentals for the long term as they realize current pricing advantages.
“Another trend impacting the office sector is the increasing mobility of employees and the rise of open offices and “hot desking”, says David Rice, Chief Operating Officer Redefine Properties.
“In the past, office building architects worked on a ratio of 20m2 per employee (including common areas and amenities) but this has dropped to as low as 8m2 per employee.”
Another big trend is the mixed-use appeal of modern office spaces – it can be said that amenities maketh the office. Clearwater Office Park boasts lifestyle offerings with tennis and squash courts, a gym, a spa and a restaurant, all of which Jordan Mann, Krisp Properties Executive Director and a Director at the Nu-Hold Group, says had proved major draw cards in addition to the modern office space.
The beautification and aesthetic appeal of offices has also become a major trend recently. A stunning example is 300 on Kent. Leader in the tile and construction adhesives TAL, recently developed a customized, ultra white mosaic adhesive to install colourful glass mosaic tiles at 300 on Kent, the new office building of the JD Group’ financial services business in Randburg.
The biggest challenge in the office sector includes slow economic growth and, therefore, a decrease in space demand; hanging user patterns due to technology that leads to reducing staff numbers; decreasing white – collar staff members due to South African economic structural patterns; the demand for new and more green and energy efficient buildings, thus leading to pressure on B and C-grade buildings; and competitive pricing as landlords fight to retain tenants or attract new tenants on an incentivised basis.
“Economic challenges are driving many businesses to downscale, and a lingering oversupply of A-grade office space is till weighing on occupancy levels, particularly evident in older CBD’s, such as central Johannesburg.”
The IPD South Africa Annual Property Index showed that around 2000 and 2001, inner-city office vacancies peaked at 36%. In 2013, inner-city offices continued to trail behind with a 12,7% total return for the year.
The future of the office sector
Rice believes the office sector will continue to experience more pressure than the other sectors in 2014. “We have seen the B and C-grade offices have been losing tenants for some years but we anticipate that vacancies will start climbing in A-grade offices, particularly those in less than prime locations,” he says. “As a result, we can expect a fair amount of leasing in the office sector, resulting from relocating tenants and not new business.” Sustained economic challenges will also make the year difficult, and tenants are likely to come under the most strain from increases in municipal costs and electricity. “To overcome this, we are actively finding ways in which to make our properties more efficient by drawing on alternative energy and water resources,” says Rice.
Izak Petersen, Chief Executive Officer, Dipula Income Fund says that we will quite likely see more of the same going forward. “There will be no fireworks,” he says, addi9ng that it will be driven as a tenant market, and we will see landlords poaching from each other from the small pool of quality tenants through aggressive incentives and space upgrades. He also says that there will be very little speculative building of new offices as well as a continued drive to decrease the overall cost of occupation through energy-efficiency initiatives.
Furthermore, rentals will increase modestly – and perhaps even go backwards for lower-graded offices. “We will also see an aggressive resistance to the increasing utility costs, as evidenced in the past five years or so,” says Petersen.