“To let” signs continue to mushroom in many of SA’s business hubs, creating opportunities for companies to negotiate lower rentals and more favourable terms with landlords when lease agreements come up for renewal.

“One blue chip corporate shaved R350m off its rental bill over the past 12 months by re-gearing its lease contract,’’ says Mark Bradford, MD of property management group Jones Lang LaSalle in SA.

He says commercial landlords are under increasing pressure to decrease net rentals in order to attract or retain tenants. “No-one can afford to lose a tenant these days, given sluggish demand and a general oversupply of office space.”

Bradford says when a medium- to large-sized tenant vacates an office building it can take up to nine months for landlords to replace that rental income. It therefore makes far more sense for landlords to offer lower rentals and more favourable lease terms than risk losing a tenant.

“It’s a win-win situation: landlords get security of tenure while corporate occupiers save on annual rental bills.”

An oversupply of office space is not the only factor exerting downward pressure on rentals. Spiralling occupation costs are also becoming a big issue for both landlords and tenants, says Bradford. The latter refers to electricity and water expenses, municipal rates and taxes and operating costs such as security, cleaning and maintenance.

Though these costs are borne by the property owner, the lease agreement will dictate to what extent they are recovered from tenants. Bradford says the economic downturn means that many tenants are unable to absorb bigger increases in occupancy costs. That’s prompting more and more corporate occupiers, large and small, to take steps to contain overheads.

Companies are becoming more inclined to interrogate budgets and invoices from property owners to ensure they’re not overpaying for consumables and operating costs. There’s also a growing awareness among SA corporates that they can no longer afford big, swanky offices. Bradford says there’s been a definite trend towards downsizing and making more efficient use of space. “In the late 1980s, corporate tenants would typically allocate 25m² of office space/employee. We are now down to 7m²10m²/employee.”

Latest performance figures from JSElisted property funds confirm that office portfolios have taken a harder knock from job losses and a slower economy than their industrial and retail counterparts. Norbert Sasse, CEO of sector heavyweight Growthpoint Properties, says demand for offices has been lacklustre at best.

“Vacancy levels remain under pressure, which means landlords have no choice but to offer competitive rentals, substantial fit-out allowances, long rent-free periods and low escalations.”

Sasse says while some corporate tenants have been downsizing, many are also looking for shorter leases. He believes that is a reflection of the general uncertainty surrounding the outlook for the SA and global economies.

Recent data from the SA Property Owners Association shows that national office vacancies edged up to 10,2% in the third quarter of 2011, the highest level since 2003. The biggest rise in vacancies has been in older, B-grade buildings.

First South Securities property analyst Leon Allison doesn’t expect any improvement in national office vacancies or average rentals in the short term. He says areas in which there has been a lot of speculative development, most notably those near Gautrain stations like Rosebank, Centurion, Hatfield and Sandton (Midrand is the only exception) are all suffering from an oversupply.

Johannesburg has the most empty office space of all the major cities, with Bedfordview, Braamfontein, Rivonia, Randburg, Parktown and the CBD counting among SA’s top 10 in terms of nodes with the highest vacancy. Durban’s CBD, Pretoria’s Hatfield and Claremont in Cape Town also count among the top 10.

“Rentals in these nodes are unlikely to improve before 2013/2014,” says Allison.

Source: Financial Mail