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Overzealous office development activity in Sandton a cause for concern

03-02-2014

Stalled by low levels of business confidence and weak growth in employment, strong growth in the demand for office space to rent has in recent years not been forthcoming.

The result of this has been office vacancy rates that were unable to decline and market rentals that showed meagre growth. Despite this, committed new office developments have on a national decentralized basis showed growth of about 17% p.a. over the past three years. The sideways and slightly upward trend in decentralized office vacancy rates since 2010 — see first chart — was therefore not only attributable to a lack of demand but also to the strong upward trend in committed new supply.
 

 

The cause for concern comes from the fact that more space is expected to come on stream in the near future. For all the office nodes surveyed by SAPOA, committed new developments amounted to 752.000 m² in the fourth quarter of 2013. Of this, about 54% of the space was still unlet at the time. A look at Sandton — the country’s largest decentralized office node — shows that it might soon also be awash with new office space. Besides Sandton being the country’s financial hub, another explanation for its popularity among developers is its Gautrain station.

According to SAPOA, roughly180.000 m² of new space — of which roughly 76% was, during fourth quarter of 2013, still unlet — is in the pipeline for Sandton. When considering this together with the fact that vacancy rates for existing buildings in Sandton are on the rise — see second chart — then a red flag has to be raised as to whether the new space will be absorbed easily. As the chart shows, vacancy rates for existing office buildings in Sandton have been edging north since the fourth quarter of 2012.

This has happened to such an extent that by the fourth quarter of 2013, the combined vacancy rate for grades A+, A and B buildings stood at 13% (unsmoothed). Grade A properties were the least rented up, with their vacancy rate of about 16%, followed by grade A+ (11%) and grade B (7%).

 

 

Finally, the third chart shows how in recent quarters the growth in office demand in Sandton has been following the growth in employment south. This, naturally, might explain why vacancy rates have been increasing. Nonetheless, on the basis of the robust relationship between employment and office demand, one can expect the prevailing uncertain economic conditions and low levels of business sentiment to continue to undermine the demand for office space. This is so because businesses are unlikely to hire new employees during uncertain economic times or while confidence levels are low. Of course, the outcome of this might be more upward pressure on office vacancy rates in Sandton as new stock comes online.

For more information, contact John Lottering on 021 946 2480.