Gauteng Office Sector 2000

Posted On Friday, 15 February 2002 02:00 Published by
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The Office Sector

Perhaps the major news currently in the market about the Johannesburg CBD is the sale of the Carlton Centre, which is tipped to become a major corporate head office. While final details are still to be released to the marketplace, it is expected that the new tenant will be enjoying the benefits of an attractive rental differential.

The Office Sector

Perhaps the major news currently in the market about the Johannesburg CBD is the sale of the Carlton Centre, which is tipped to become a major corporate head office. While final details are still to be released to the marketplace, it is expected that the new tenant will be enjoying the benefits of an attractive rental differential.

Aside from that good news, CBD office brokers report that the node is seeing little new activity and in fact some tenants are continuing the northwards trend. It is understood that certain non-governmental organisations are re-locating to Braamfontein (which is becoming an educational and NGO node) from the city centre, perhaps because of the on-going perception of crime. Top CBD gross office rentals achieved for A-grade space are approximately R32/m2.

Having said that, there are numerous initiatives underway and much hope has been pinned on the successful implementation of the Igoli 2002 plan of action, which lays out a two-year action plan for getting the City of Gold back on track. Other projects include:

- the Jack Mincer taxi rank and taxi parking project;

- an inner city spatial development initiative in Newtown, aimed at promoting development;

- a social housing project in Albert Street;

- the R35m upgrade of inner city housing;

- the All Africa Games is expected to have positive spin-offs for the inner city; and

- ongoing crime initiatives, like the Car Guards Project.

Despite this, capitalisation rates continue to weaken and the gap between CBD and decentralised rentals continues to widen.

In both the northern suburbs and Sandton, an under-supply of space may be beginning to emerge. While developers have adopted a cautionary view to new projects in the past 18 months, thanks to high interest rates and a general economic slowdown, demand has continued although arguably at a slower pace. The result is that this same level of demand is increasingly difficult to accommodate.

In the northern suburbs of Johannesburg, the nodes are generally displaying a stable market. In many of the nodes, there is little land available for new development so that even though existing space is new and vacancy levels are low, the potential for future development is limited. Another general comment regarding the northern suburbs is that they tend to lack the proximity to retail and social amenities which is a drawcard in Sandton. There are of course exceptions to this, the most notable of which is Rosebank. An additional factor is that office space in many of the upmarket northern suburbs nodes can be had for lower rentals than comparable space in Sandton.

Parktown’s office space is achieving gross rentals of between R32/m2 and R45/m2, but the node has little room for new development. The node’s good access and central location between the CBD and northern commercial nodes is one advantage, as is the fact that Parktown is still served by municipal bus routes. The greenbelt environment of the node is an added attraction. On the flip-side, Parktown has little in the way of restaurants or retail facilities, although it is the location of the Sunnyside Crowne Plaza hotel which serves the area. The Isle of Houghton is achieving around R51/m2 gross.

Killarney is a small node that has received a strong boost from the recent expansion and renovation of Killarney Mall. Demand comes from corporate and professional tenants and the nodal market is stable, with high occupancy levels but little new leasing activity. New development will have to start re-zoning residential property, since there is no commercial land available for development.

Close by, the office strip in Houghton between the M1 motorway and West/Central Streets has attracted a variety of tenants from the travel and finance sectors, as well as professional and small to medium-sized corporate offices. Again, Houghton has little to offer in the way of retail or entertainment amenities, but it has good access via the M1 motorway. Gross rentals for new, premier space are between R58/m2 and R64/m2. The construction of the new Clarins head office on Scott Street in Waverley may indicate the potential for Houghton to continue to grow northwards along the M1 to Corlett Drive.

The Hyde Park/Dunkeld node is also displaying low vacancies and remains popular. Gross rentals are in the region of R50/m2 and R60/m2. The node is home to companies like Arthur Andersen and Ericsson.

Rosebank is a well-established commercial node and is one of the few in the northern suburbs which offers a wide array of retail and other facilities, including clinics, hotels and restaurants. Many of these amenities are within walking distance. Although vacancies are low, rentals have remained fairly stable for the past year: the top-end gross rental for prime office space is around the R70/m2 mark, while gross rentals for older space with limited parking are between R45/m2 and R60/m2. The major new office development in the node is for TA Bank on the corner of Seventh Avenue and Jan Smuts Avenue, and the bank is expected to tenant a large proportion of this new space.

Another trend in this area is that of home offices, or the conversion of old homes to offices, along major arterial routes. Oxford Road, Jan Smuts Avenue and Glenhove Road are all seeing this type of commercial activity.

It is worth pointing out that Rosebank has become the first commercial node outside the Johannesburg CBD to establish a management district (and eventually a City Improvement District). The importance of this move is that Rosebank’s management district is in a position to prevent urban decay, as opposed to the CBD’s CIDs which have a reactive role, and the RBMD’s success in achieving the aims of urban rejuvenation will be of interest to commercial nodes around the country.

The first phase of the mixed-use Melrose Arch project is expected to become available at the end of 2000. Brokers report that demand is already being expressed from potential tenants, and the development’s mixture of offices, hotel, conference facilities and retail centres could enjoy high levels of demand.

Illovo is a well-serviced node which is popular with a range of different businesses, although traffic congestion is a major problem, especially where Oxford Road narrows into Rivonia Road. This situation has been worsened by the temporary closure of Fricker and Melvill Roads. The new concept Illovo Boulevard to the west of Oxford is seeing some speculative development which is expected to achieve rentals of between R65/m2 and R70/m2.

The Sandton node continues to enjoy high levels of demand, despite the general market slowdown, and brokers are beginning to report an under-supply of premier office space - particularly in the Sandton CBD. For example, the 20,000m2 final phase of Merchant Place was let without the assistance of outside brokers which bears testament to the level of demand in the market.

The problem lies with demand for large premises. Brokers report that enquiries for space of between 2,000m2 and 10,000m2 are coming in, but cannot be accommodated easily by the existing supply of premises. Sandton CBD is expected to see some 70,000m2 of new office space coming on-stream in late 2000, it seems that new space has already been fully let and thus is unlikely to alleviate the increasing under-supply of offices in the node.

Examples of new developments that are taking place around the central Sandton region include the 14,000m2 Compaq project on the corner of West and Maud Streets and a new 9,000m2 office premises for Discovery Health on the corner of Alice Lane and West Street.

Nedbank’s Cherrycroft Estate will bring an additional 60,000m2 space onto Rivonia Road and will be fully owner-occupied. The re-location of the Johannesburg Stock Exchange to Maud Street will add a further 14,000m2 of offices to the node, while the move itself re-affirms Sandton’s undisputed status as Gauteng’s financial district.

Rental growth is benefiting from the rising demand for offices in the Sandton CBD. However, brokers caution that while tenants are prepared to pay high rentals, they are uncompromising about the quality of space which they expect to lease. Top-end gross rentals remain around the R80/m2 mark.

One trend that does seem to be emerging is that of sub-leasing. In the case of expanding tenants moving to larger premises in other nodes, the potential does exist to negotiate sub-leases at favourable rentals. Certainly, throughout the northern suburbs and Sandton, leasing seems to be the preferred route in the prevailing market and sales of properties are generally slow.

The concern which new development raises is that of increased traffic flows into the Sandton CBD - estimated to be in the region of some 6,000 additional vehicles - and this could exacerbate the problem of congestion from which the node is already suffering. There are reports of tenants who will not consider moving to central Sandton purely for this reason.

Debate surrounding the much-vaunted increase in Sandton rates in 1995, which caused a significant outcry during 1996 and 1997, has been resolved and the issue of rates and taxes in the node no longer appears to be one of general concern.

In nodes such as Wierda Valley, the inability of expanding businesses to find additional space has also become a constraint and some tenants are seeking alternative accommodation in other nodes. Companies like Vodacom, ABB and ABN Amro are moving out of Wierda Valley, while there are tenants along Katherine Street, particularly at the northern end of the road, are looking for space closer to the CBD proper.

The problem of finding additional space in central Sandton has prompted some companies to move farther afield. Sunninghill is one northern Sandton node that has benefited from this trend in recent years, although new development is being severely constrained by inadequate road infrastructure and reportedly significant traffic congestion problems.

Lower rentals than in Sandton CBD are one of Sunninghill’s attractions, but rental growth has reportedly remained fairly static as a direct result of these traffic infrastructure constraints. The node continues to achieve gross rentals of between R45/m2 and R50/m2 for prime space but brokers expect increases to be limited to average rental escalations until the problem is addressed.

Fourways has seen high levels of development in the past 12 months and the new Fourways Crossing retail centre opened its doors in 1998. Once again, there are concerns regarding the capacity of existing infrastructure in the node despite plans for certain roads to be widened.

The high demand for premier office space in nodes outside the Sandton CBD is indicated by the fact that speculative developments are taking place, despite the overall market stasis evident in much of the country. African Life Properties are developing an office project on the golf course in Woodmead. Woodmead Estate was completed in 1998, also on a speculative basis. Rentals for offices in this development reportedly rose from R55/m2 to R60/m2 during the course of the year and it is understood that the project is fully let.

The emergence of successful speculative development may be the first sign that the prime office market in Johannesburg is beginning to see more activity, on the back of the under-supply that resulted from general market slowdown and, arguably, high interest rates over the past few years.

The office market in Midrand continues to display low vacancies in existing premises and is achieving rentals of around R40/m2 - R48/m2, which is relatively cheaper than the office nodes to the south. The majority of office space in the node is found to the west of the M1 motorway, in developments like Waterfall Park, which has emerged as a mixed-use node, with its own restaurants, convenience retail and banking facilities for tenants. However, Midrand is perceived to be more of a light industrial, warehousing and distribution node and it is expected that new development activity will focus more on industrial projects with an office component, than 'pure' office projects.

Before turning to the office market in Pretoria, it is interesting to consider the following trend in rental differentials. Sandton’s A-grade office rentals are almost twice those of the Johannesburg CBD, while Pretoria’s Brooklyn/Waterkloof node is characterised by rentals that are about 1,4 times that in the Pretoria CBD. Either this could indicate that CBD demand in Pretoria remains relatively strong, or else it indicates that the Pretoria market is following in Johannesburg’s footsteps.

Brokers in Pretoria report that the approach being adopted by developers and investors is one of 'no risk' and 'no speculative development', which is very much the same situation as in the majority of Johannesburg’s office nodes. At the same time, there is an overall under-supply in the market, with available space being scattered in small pockets throughout the different office nodes. Landlords continue to look for leases of five years or more, as part of the prevailing market’s need for certainty.

There is some indication that the Pretoria CBD market is stable, especially where landlords are prepared to negotiate attractive tenant installation allowances and other incentives. Perhaps another reason is that the CBD’s office rentals are competitive and good quality space can be let for about R35/m2.

Brokers report that there is a significant shortage of space in Brooklyn and there are expectations that the local council will be implementing a stricter re-zoning policy in the node, which may push up rentals in the coming year. It is furthermore anticipated that land will become increasingly more difficult to re-zone, which may again limit supply and tighten the market. Top-end gross asking rentals in Brooklyn are approximately R55/m2.

Hatfield has seen some movement of tenants outwards to Brooklyn and Menlyn - for many of the same reasons that businesses are decentralising from the Pretoria CBD - perceptions of crime and grime and congestion problems. Medium-sized office developments of between 1,500m2 and 2,000m2 are still expected to take place in the node, but generally only where space is pre-let. Home offices continue to be a major feature of the office market in Hatfield.

As a general comment on the Eastern Suburbs market, enquiries for space are ever harder to accommodate. One of the reasons for this is that the development market is operating on a strict, demand-led, tenant-specific basis and new space is let before the project is completed.

This particularly impacts smaller tenants looking for space of between 100m2 and 150m2, especially when they are unable to afford high rentals.

While retail activity is starting to emerge in the north and north-eastern nodes like Montana, the office market is mainly centred around the CBD and the eastern suburbs with little development or demand in the west or north.


Publisher: JHI
Source: JHI

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