Office vacancies at 2003 levels

Occupiers downsizing to smaller quarters is projected to put even more pressure on an office sector struggling with record vacancies. Data from the SA Property Owners Association shows vacancies climbed to 16% in the last three months of 2021, a percentage point above the previous record in 2003.

A hybrid work model, which includes working in the office and from home, as well as occupiers downsizing to smaller quarters, is projected to put even more pressure on an office sector struggling with vacancies.

With occupiers being selective on office locations, landlords would need to be flexible to the changing needs of tenants to retain them, analysts said.

Data from the SA Property Owners Association (Sapoa) showed that vacancies climbed to 16% in the last three months of 2021, which is a percentage point above the previous record in 2003.

During this period, total vacant space amounted to 3-million square metres, putting pressure on rental prices.

After almost a decade of economic stagnation, landlords were dealt a huge blow in 2020 with the outbreak of the Covid19 pandemic, with subsequent lockdowns seeing tenants going out of business or seeking payment holidays. With more people working from home, companies are also reassessing their space needs.

“Significant economic and employment growth is needed to reduce vacancies. Until then, the sector will continue to suffer as occupiers review their space needs upon lease expiry,” Sapoa said.

CONVERSIONS

Old Mutual Investment Group portfolio manager Evan Robins said the oversupply and weak demand was more notable in major office nodes such as Johannesburg.

“Office developments have almost come to a halt and thus new supply entering the market isn’t a problem. Remote working has created further uncertainty about the sector outlook,” said Robins, adding that a sluggish economy and lack of job growth had constrained demand for office space.

He said landlords would need to find alternative uses, such as residential conversions or selling off assets. “Both alternatives are not easy or feasible for all buildings. Landlords have been offering lower rentals and increased incentives and commissions to try to attract or retain tenants.”

In the fourth quarter of 2021, it took 30 weeks to sell an occupied office building, and an estimated average of 35.54 weeks for vacant properties, according to FNB.

“In the current market, retaining tenants is key, and well-maintained, energy-efficient buildings remain desirable for tenants,” said Robins.

Redefine Properties national asset manager Pieter Strydom said Redefine was engaging the broker community and tenants, as well as improving efficiencies in the ratio of rented space to the total available space to reduce vacancies.

“We work closely with our existing tenant base to manage occupations and assist with expansion mainly driven by the portfolio’s extensive premium and A-grade offices,” he said.

Redefine has launched the first auction for leased space in the commercial market, and the platform will be expanded to reach a wider leasing pool.