THE Cape Town office property market, which has performed poorly for some years, seems to be turning around, with vacancy levels starting to plunge.

The central business district and Claremont, which had massive vacancies in the past, have experienced major reductions thanks to the trend of converting offices to residential units.

Meanwhile, demand is soaring for office space at mixed-use node Century City.

Greg Deans, MD of developers Century City Property Developments, says demand for office space from both smaller and larger tenants at Century City has reached unprecedented levels, prompting the acceleration of a number of new commercial developments.

Deans says strong demand — which saw office vacancies at Century City drop to a record low of 4,3% in January against 13,04% a year ago — is being spurred by a number of factors including strong economic growth, low interest rates and rand exchange-rate stability.

"Firstly, there has been a period of consistent growth in the South African economy, currently in excess of 3%, which historically leads to fairly strong take-up of office space," says Dean. "In addition there has been a period of relatively low interest rates."

Dean says the stability of the rand exchange rate has allowed for forward planning.

He says the conversion of a significant amount of office space in both the CBD and some decentralised nodes — such as Claremont, where vacancies were extremely high a number of years ago — had also had a positive effect on office vacancy levels.

In Claremont alone about 15000m² of office space has either been converted to residential units or demolished to make way for residential developments, he says. Conversions are planned for another 9000m²-10000m².

Dean says that very little new office space has been brought to the market on a speculative basis in the past four or five years, stoking demand.

At Century City, Dean says, although the greatest demand for new office space is coming from small to medium-sized businesses, there has also been an unprecedented number of inquiries from larger owner-occupiers.

He says work on the first new commercial block — a 10500m² regional head office for an international company — has just started, with more to follow.

Dave Russell, a director of Cape Town-based commercial property brokerage company Baker Street Properties, says his company believes this year will be the year that office rentals "turn and increase".

Russell says this has been driven by a reduction in vacancies throughout major office nodes. "Claremont has had a substantial turnaround in terms of vacancies, but it must be noted that a substantial portion of the vacancies was removed through planned residential conversions of one of the major office buildings in the node.

"This was the original Norwich head office and it has now been converted to residential."

Russell says 50% of Claremont’s vacancies were contained in this one building.

Colin Young, fund manager of Old Mutual’s SA-listed property funds, says that according to the Investment Property Databank’s (IPD’s) 2003 figures, the Cape Town CBD was the worst performer in the country in terms of offices, reflecting the trend before all the residential conversions.

Young says that when the 2004 IPD data is released in March, he is expecting a significant turnaround in the Cape Town CBD. "By the end of 2005 Cape Town’s CBD could arguably be the best CBD office performer in the country."