OFFICE rentals are expected to strengthen as demand for office space increases rapidly on the back of a strong South African economy.

Brian Azizollahoff, CEO of listed property loan stock company Redefine Income Fund, says that while new developments will help to meet the growing demand for office space in two or so years, the recycling of older buildings and upgrading of lower-grade office buildings provides a more immediate solution.

He says this is also more cost effective, as one of the advantages of recycling older buildings and upgrading lower-grade office buildings is rentals can be contained. The reason for this is the developer does not require a large revenue stream to achieve the same return on investment as a new development.

Azizollahoff says the planning, obtaining of rezoning and other permissions, together with the actual construction of new office buildings, results in a development roll out of two-and-a-half years at best. Because of rapidly rising construction and development costs, these new buildings may also demand rentals of more than R120/m².

Azizollahoff says that limited development in the office sector, which had an oversupply problem over the past few years, has contributed to the shortage of prime office space. He says Redefine’s Sandton and Bruma office portfolios are fully occupied, and that its total office vacancies are down to about 3% from about 7% a year or two ago.

Property economist Erwin Rode of Rode & Associates says it is “rational” to redevelop older buildings as long as their location is suitable and there is enough parking. “Parking is crucial. So often with older buildings the availability of enough parking is a constraint,” says Rode.

He says the growth in demand for office space is “mammoth” in metropolitan areas right now because of the strong economy.

Rode says the re-engineering of buildings is “elegant in principle”, but there is a limited supply of the types of buildings that can be upgraded.

Meanwhile, Grant Kirchmann, commercial leasing consultant for Investec Property Group, says the increased take-up of A-grade commercial space in Sandton has resulted in significant upgrade and refurbishment activity of older office buildings.

According to Kirchmann, meeting the demand for A-grade commercial space through refurbishing older offices achieves better returns than new office developments.

“The refurbishment of commercial property realises high rentals with smaller capital investment, and simultaneously provides the opportunity to realise additional bulk, improve parking ratios and extract additional value,” Kirchmann says.