Office landlords must give more to tenants: 2010 warning

Lower rents, increased tenant allowances loom; national vacancy snapshot. South Africa's office landlords - and particularly owners of lower grades of space - are set to take more strain for at least the next year, thanks largely to tough economic conditions. Those who don't throw in extra incentives can expect more of a battle to keep or find tenants.

That was the message from David Green, managing director of the Pace Property Group, who said South African landlords will have to follow the lead of their European counterparts in order to retain tenants by offering incentives like lower rent and increased tenant installation allowances. Owners of lower grade office space are likely to be hardest hit, he said.

Vacancy rates have been rising quickly since the start of the year, particularly for B and C grade office real estate, warned Green, noting that this trend looks likely to continue next year.

Johannesburg-based Green highlighted some of the challenges facing European commercial real estate landlords who, in the grip of a chilly global recession and oversupply, have seen rentals fall, in some cases dramatically. He said that Western and Eastern office markets in Europe have recorded annual declines of about 8% and 10% respectively, while Central Europe has seen rentals fall by a staggering 28%.

The South Africa office market, meanwhile, has on the whole "proved more resilient". Green highlighted some statistics about South Africa's commercial property market, including that:

    * Prime  "A" grade vacancy rates remain below 4% in the dominant office nodes such as Sandton and 6.5% for Cape Town's central office space;

    * Vacancy rates in B and C grade office nodes "have however risen sharply with overall vacancies across all grades having more than doubled since the beginning of 2009". In January, Sandton vacancies were recorded at 5.6% and they are now around 7.2 %. Woodmead vacancies have risen from 2.7% to 8.3% for the similar period.

"Over the 10 months to date Cape Town has seen office vacancies rise from 6% to 8%. In the Western Cape one of the few exceptions to the rule was Century City which saw vacancy rates fall marginally from 13.8% to 12.6% for the same period," said Green.

Historically Durban Central Business District vacancies have remained stable of around 14.8%, while Umhlanga and La Lucia "reflected modest vacancies of 1.9%".

Of all the CBD vacancies measured, said Green, the Pretoria CBD "remains the ‘best let' CBD precinct with overall vacancies at only 4.3% which although up from 2.5% earlier in the year represents only 20 700m² of vacant office space".

The risk of vacancies will increase through 2010 and improvements "may only be evidenced towards the end of 2010 and into 2011".

Particularly hard hit will be B and C grade vacancies as this represents the bulk of available office stock and is most vulnerable to a slowdown in the broader economy, said Green.

"As in the European examples the landlord incentives will be needed to be improved if the tenants are to be retained or ‘attached' to lower grade office space in South Africa's primary and other office nodes. Similarly the downward adjustment of rentals and increased tenant installation allowance will become order of the day," predicted Green.

Others seeing signs of trouble on South Africa's commercial real estate horizon include Rode & Associates. Its economists recently pointed to growing vacancies for retail landlords and cautioned  that listed property stocks - big owners of shopping malls - might not continue to produce the returns expected by investors.

Rode economist John Lottering said over the three months from July to September 2009 the yearly growth of income streams from property loan stock funds still managed to average roughly 10%‘, however rising voids - tenants closing shop or downsizing, and thereby requiring less space - means a direct loss of rental income to the listed funds.

"Also, tenants are naturally only too aware of stalling turnover growth, and those who are about to enter into new contracts are aware of their increased rental-bargaining power. This could mean that some landlords - especially owners of shopping centres - will be under duress to offer rental concessions," he said.

Get commercial property news by email

Free alerts when we publish — pick a focus or get everything, unsubscribe in one click. Subscribe »