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Letter from the editor THE commercial property sector is under pressure. I wish there was some light at the end of the tunnel, but talking to those in the sector, it’s clear they are going through a tough time and are under severe stress. For one, conversions of office space to residential have not quite hit the sweet spot. At the same time, South Africans – with labour data showing 1.4 million fewer are employed compared to the same time last year – are still reeling from Covid debt, meaning less shopping, less buying and less holidaying. Companies themselves are calling for hybrid work weeks with some offering a day or two in the office, or even just a “hot desk” shared by different workers at different times. None of this bodes well for commercial property owners and tenants. While retail is battling to maintain its position and the office sector is struggling, it’s the hotel sector that has been hardest hit. With less foreign travel and domestic travel also restricted because of Covid debt and, well, Covid, it doesn’t look good. Construction companies also tell us building costs are high and things are tight. Distressed companies and affected landlords are under pressure to sustain themselves. Many tenants need urgent help from landlords who themselves are battling. Faced with having empty properties, some landlords have had to relax their terms, offering rent holidays or other concessions. Of course what’s bad for some is good for others and there is probably no better time for prospective tenants to get a good deal when it comes to renting office space. Some tenants are even being given the first three to six months rent-free if they sign a long lease. Surprisingly there are some who say this decade may still see a boom. Looking at the picture painted by economists, looking at the stats as well as talking to commercial property owners at the moment it’s hard to see where this will come from. However, this sector is known for its innovation and adaptability, and we are likely to see new emerging trends. We are already seeing good things in the industrial sector, especially with storage facilities which have grown over this period. Let’s hold on to these green shoots and not be discouraged. Warm regards
Vivian Warby vivian.warby@inl.co.za
The office property sector will remain under severe pressure this year, say experts.
Office property sector facing rough patch Experts say this is no time to be in hotels either, thanks to the effects of the pandemic, which means foreign visitors aren’t coming and locals can’t afford to stay in them BY BONNY FOURIE bronwyn.fourie@inl.co.za
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HE OFFICE property market continues to wallow in a pit of oversupply and rental income pressure – and not even the trend of officeto-residential conversions will be able to save it – not anytime soon, anyway. The situation for hotels is even more depressing, says FNB commercial property economist John Loos. The commercial property market, generally, was under pressure in terms of rising vacancy rates even before the coronavirus pandemic and lockdown but the past year has been the toughest for a long time, “for obvious reasons”. Citing recently released MSCI data for last year, Loos says the overall vacancy rate for all commercial property was 8.7%, up from 7% in 2019 and 5.9% in 2017. While the rates for last year were 5.8% for retail and 5.9% for industrial property – which “typically have lower vacancy rates anyway” – the rise in office rates was most noticeable – 16.2%, from 12.7% the previous year. “Office property does have a very high natural vacancy rate but there is no doubt that it is in a spot of bother.” This sector is not helped by the fact that residential rental vacancy rates – which will have an impact
on the possibility for conversions to assist office space demand – were even higher at 18%, a significant increase from 10.4% in 2019. While Loos says there are occasional announcements of office-to-residential conversions in Sunninghill and Sandton in Joburg, and in Durban, he is not convinced that the trend is widespread or that it will absorb much of the oversupply. To do this, office properties would need to be converted into more affordable rental homes, which is often problematic due to the costs of such conversions. “The big problem in places like Sandton, for instance, is that there is not only a high office vacancy rate but also a high residential vacancy rate... so, I don’t think there is room for more luxury, upmarket residential properties. “If you are going to do something with office buildings, they will need to be converted into more affordable residential offerings. “This will then change the income demographics of areas like Sandton, Sunninghill and Rivonia, and these will be big changes. Even retail offerings will have to change significantly. So, I do not see it playing out any other way. “If the residential vacancy rates were low, then fine, we could re-purpose like crazy, but not
when there is an oversupply of residential property too.” “Quite a few” conversions are taking place in Sandton, Randburg, Sunninghill, Rosebank and the Johannesburg CBD, says Zeenat Ghoor, chief executive and founder of Aspire Consulting, but such re-purposing is made “more challenging and less popular” by the building costs. “The buildings need to be configured in a way that makes it possible to be converted to residential and the price of the building needs to be favourable. Considerations like parking, location and town planning schemes are also important.” This means while a high percentage of unoccupied office buildings can be converted, the sales costs have to be measured. “The next conversion (trend) could likely be office buildings to sectional title offices or mixeduse spaces, so there is not an oversupply of residential units,” she says. The past two years have seen an “aggressive push” towards office conversion to co-working spaces. This is due to businesses downscaling and opting to have staff work from home. Ghoor adds: “There has been a shift in thinking about working and it has become acceptable to have
meetings online and work at home. While this has simplified travelling, reduced travelling costs and kept us safe, a large percentage of people prefer face-to-face meetings. “Humans also need contact with others to thrive, grow and learn, so a co-working space provides the interaction space needed at a much reduced overhead costs.” Gary Vos, franchisee of Rawson Cape Metropole Blaauwberg Commercial, says there are “twice as many” offices than the market needs. “For that reason, some of these offices are staying vacant for longer periods, while others are being converted into residential apartments. Much larger offices are now being subdivided and used as communal offices (letting desk space only).” The “real dog” of the property market though, Loos says, is hotels, the smaller and often-referred to as the fourth sector, of the commercial property market. “This sector will be worst of them all, I think. Foreign tourists are not coming back in a hurry, domestic tourists are cash-strapped, so holidays have been put on the backburner, and a lot of business travel is not coming back. The ‘Zoom boom’ has been successful, so the hotel property market will be under serious pressure this year.”
DISCLAIMER: The publisher and editor of this magazine give no warranties, guarantees or assurances and make no representations regarding any goods or services advertised within this edition. Copyright ANA Publishing. All rights reserved. No portion of this publication may be reproduced in any form without prior written consent from ANA Publishing. The publishers are not responsible for any unsolicited material. Publisher Vasantha Angamuthu vasantha@africannewsagency Executive Editor Property Vivian Warby vivian.warby@inl.co.za Features Writer Property Bonny Fourie bronwyn.fourie@inl.co.za Design Kim Stone kim.stone@inl.co.za
