Nick Wilson

       
LOW office vacancies, increasing demand for space and the prospect of office rentals rising later this year all suggest that there might be a flood of new office developments leading to an excess of supply over demand at prevailing prices. On balance, however, market experts do not expect this.

Office vacancies in SA’s decentralised nodes are at their lowest levels in at least 10 years.

The last time there was an oversupply of office properties was in the early 2000s. At that time developers built a lot of offices on the back of declining interest rates.

Much office space stood vacant for years as a result but in recent times the vacancies have been mopped up by steadily growing demand.

Rocketing building costs are likely to put the brakes on opportunistic development this time around.

Francois Viruly, a property economist, believes A-grade office vacancies are, on average, at the 5% level.

“Where the vacancy rates are now I believe is the trigger for rentals to start rising significantly. In the past few years we saw rentals stuck between R60m² and R70m² for A-grade space. It wouldn’t surprise me to see A-grade rentals hitting R100m² this year.”

Increasing rentals could be a temptation for developers to start building to meet market demand. “The big question which many practitioners who have seen the property cycles in SA are asking is whether we will oversupply the office market with office developments.”

He says the last oversupply was supported by low interest rates which made property developments viable. But building costs are now rising 20%-30% a year and this could dampen the supply and viability of new developments.

“I don’t see significant risks of an oversupply. For many new developments to come on stream, rentals will have to be closer to the R100m² mark to make them viable — because of the rising building costs.”

But there is concern about oversupply developing in certain pockets of the market. Viruly says another “dynamic to watch out for” is the listed property sector, which will start building its own office supply as it finds it more and more difficult to find property stock in the market.

Yields in the listed property sector are low enough to encourage development by listed property companies to take place.

There is a shortage of quality commercial properties in the market and sellers are asking high prices. For listed property companies, this makes developing their own property stock an attractive prospect.

“That could be a risk and could create an oversupply.” But Viruly says he does not see the risk of an oversupply entering the picture until the latter part of next year because the office market still has a “fair amount of catching up to do in terms of rentals”.

David Green, MD of commercial and industrial property brokers Pace Property Group, says that, by and large, office tenants are rent sensitive and not all of them can afford A-grade rentals.

Green says that whereas developers may develop more office space, it is generally for a “specific tenant’s requirement”.

“There is not much speculative office development like there was a few years ago. Building costs are so high, land prices are extremely high and developers cannot absorb the risk of speculative office development because A-grade office space will cost between R10000m² and R12000m² to build and that is why you have to achieve in excess of R100m² for rentals.”

Green does not believe the listed property sector will create an oversupply problem.