Rental growth and office space demand

Currently the demand in the commercial property rental market seems to be fairly lacklustre and on a whole we believe that this situation is set to continue for quite some time.

Luntz says, “Despite what seems to be a fairly negative outlook, there are pockets of areas in northern Johannesburg where the demand for office space has in fact increased over the past twelve months and subsequently this equates to lower vacancy rates in those particular areas. Recent examples are Illovo where A-grade vacancy has decreased from 2.9% to 1.2%  for the period June 2010 – June 2011. We have also seen a decrease in A grade vacancies in Rivonia, Melrose, Rosebank,  Sunninghill and Woodmead.”

“Through interaction with both landlords and tenants we have tracked these trends and seen that these areas tend to be prime nodes and tenants are taking advantage of the soft market to move into these areas at reduced rentals.”

In comparison, Sandton, however, has experienced an increase in A grade vacancies for the period June 2010 to June 2011 from 7.7% to 8.4%.  Luntz says, “This is going to be exacerbated with the ongoing development currently taking place and planned for the Sandton CBD.

Research shows that there are over 30 development applications currently in for approval.
These applications include zoning changes and renovations. Furthermore, one doesn’t know how many developments are going to be put up on spec.  Given the state of the current market, this is a risky approach however that being said it we do recognise that with increasing holding costs, developers can’t wait forever. If developments do go up on spec, this will clearly increase the vacancies in the area drastically.”

Similarly, Rosebank is also of concern. Currently it does look better than Sandton with a slight take up of vacancies. Vacancies in June 2010 for A grade buildings were 17.9%, in comparison to June 2011 vacancies which were at 16.6%. These vacancies are however still way above the national average and with approximately 80 000sqm of new space coming on stream we can only expect to see a negative impact on vacancies.

Luntz continues, “With increased vacancies comes pressure on rentals. Despite the situation, there has been robust rental growth in certain select areas such as Sandton CBD at 11%, Parktown at 10%,  Bryanston at 7%, Illovo at 4% and Rivonia at 2%.

“When looking at each area in more depth, trends show that whilst Sandton vacancies went up slightly, the rental growth increased. Normally this would seem to be an anomaly, but in this market it demonstrates the attractiveness of Sandton as an office node and the fact that that tenants who want to be in the area are prepared to pay.”

The node of Parktown also showed an increase in vacancies from 3% - 4.1%, but rentals grew at 10%. Feedback on this indicates that this is due to rentals in Parktown coming off a very low base. Bryanston’s vacancies decreased from 8.6% - 7.2% which translated into rental growth of 7%. Illovo also showed a slight decrease in vacancies which translated into a slight increase in rentals of 4%

Rivonia’s vacancies reduced from 20.7% for A grade stock to 13.8% however rentals only grew by 2%.  13.8% is still very high and this would cap any significant increase in rentals.

Lastly, Rosebank in fact showed a decline in rental growth at -2%, notwithstanding that it had a decline in vacancies. As with the situation in Rivonia, such a high vacancy level will cap any increase in rentals and as in Rosebank’s case even force rentals to go into minus territory.
Luntz concludes, “With the market set to continue on this track, landlords need to exercise caution and manage their vacancies carefully as well as to strategise on ways to grow the market as we can see from the trends emerging that the market does have potential to flourish.”  

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  • Adriaan Grove - posted 18 Nov 2011 09:11 AM                                    

    Yes from what I can see it looks like the Gautrain has an effect. We are looking for offices and the ones on the Gautrain route are taking preference. Just makes it easier for staff and clients who want to make use of the Gautrain.

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