Office demand in Cape Town has been primarily driven by call centres in the past year. The only notable deal this quarter is the take up of office space in excess of 3,000m² space in the CBD by an international call centre. Demand for office space is relatively flat in the Cape Town market as most companies have gone through consolidation and building efficiency initiatives in the past few years. However, as leases reach their renewal dates, businesses are taking advantage of competitive lease terms.
Supply
Total supply in 7 of the major commercial nodes researched by the South African Property Owners Association amounts to 2,187,667 m² with predominantly Grade A stock at 65% of office buildings and 33% of Grade B buildings. The city centre is the largest node by far consisting of 878,000m² of office space or 40% of the total Cape Town office supply (excluding government buildings).
Indicative committed developments amount to 133,300m² with 60% of this or 79,500m² being speculative developments with the bulk of these being located predominantly in the CBD. The indicative development pipeline includes Portside, a 50,000m² development of which 50% is to be occupied by divisions of First National Bank with the balance of the development being speculative. The balance of the speculative developments is situated in the CBD, Century City and Tygervalley. The prime V&A Waterfront office node has only one notable development, being the Allan Gray building for 12,000m² which is due for completion later in 2013.
Vacancies
Total vacancies in the Cape Town reduced to 9.1% in Q4 2012, performing better than the overall national vacancies (at 10.4%). These lower vacancies are not an indication of increased demand but are attributed to limited new stock in the Cape Town market. The nominal Grade P (Premier) vacancy levels are at 0% due to limited quality stock; therefore landlords are starting to commit to new quality developments. Whilst there is a need for quality space in Cape Town, the amount of vacancies are expected to increase once these new developments come onto the market later in 2013 and 2014. This poses a cause for concern, especially now that demand is limited.
Market Rentals
Our monitored prime buildings show that rental performance has been stagnant for the past year between R130/m² and R160/m². Gross rentals for Grade A buildings in the V&A Waterfront average R153.3/m² and the City averages R102/m². Rental performance remains flat, with prime rentals showing little growth from the previous quarters. Pressure on rentals is expected to continue for a few months as business growth is constricted.
Market Outlook
A two tier market exists in Cape Town, where the limited demand is for quality buildings placing further pressure on secondary buildings where vacancies are already very high. This is further supported by the increased commitment to pipeline development and more secondary stock being considered for refurbishment.
The projected and continued slow economic trajectory in South Africa will however, continue to impact the office market resulting in pressure on an already oversupplied secondary office market as well as suppressed rental growth.
The current market conditions are expected to prevail for much of the year or at least until the economic environment improves.
Source: Jones Lang LaSalle
