Office rents  

TENANTS' MARKET IS OVER      

By Ian Fife

Landlord payback as world's lowest space costs start catching up with international markets     
 
Office rents in Johannesburg and Cape Town have burst through R100/m²/month for the first time in five years, confirming a shortage of quality space.

And companies looking for lower-grade space are being forced into secondary suburbs. Six months ago, experts said the oversupply would take 18 months to mop up. 

Tenants in Johannesburg's Melrose Arch are renewing leases at R115/m², says Stuart Chait, CEO of its new owners, Property Partners. Colliers broker Debbie Echstein signed a tenant for a new building in the Sandton CBD last week for R100,18/m², after a similar lease in the same building went for R87/m² a few months ago. 

"Larger tenants of 1 000 m² or more on long leases can still get reasonable rents, but my next letting of premium space to a smaller tenant of around 400 m² will probably be at R120/m²," says Echstein. Agents say that tenants are renting space faster than expected as confidence and the economy improve. 

"With the exception of the CBD, the oversupply of space in Johannesburg is almost gone," says David Green, CEO of commercial brokers Pace. "Tenants have little choice. A corporate tenant wanting 5 000 m²-7 000 m² has maybe two buildings to choose from, neither of which he would choose first." 

He says Parktown and Braamfontein, next to the Johannesburg CBD, are filling up, "not because tenants necessarily want to be there but because that's the only suitable space they can find". A-grade rents are up to R70/m² in Parktown, though lower-grade space can still be had for R35/m².

Randburg is probably the only business centre with large office areas available at below R30/m².  Echstein says Sandton City's office tower had large blocks of empty space in mid-2004 and its twin towers were almost empty. "Today there are a few pockets left and the lowest rent available in Sandton is now R50/m²."  But perhaps the most dramatic turnaround has been in the Cape Town suburb of Claremont.

Six months ago 30% of the office space was empty and rents were languishing at below R60/m². But a sudden conversion of offices to flats brought the oversupply to zero. Property Partners decided to pull one of its conversions, the former Norwich Insurance headquarters, off the market and keep it as offices. 

Last week they launched it for rent, letting all the space at around R103/m², according to Chait. Tenants include African Harvest Managers and Alpha Asset Management.  For the moment, Property Partners is achieving the highest rents and Chait says this is because both Melrose Arch and his Claremont development are mixed use.

"British research shows convincingly that many tenants are happier and investors get better returns by mixing office, residential and retail." 

Cape Town broker Theodore Yach says the pace of letting has risen in Tyger Valley and Century City, as well. And Cape Town CBD vacancies have fallen below 10% for the first time since 1988. "You can still get premium space in the Metropolitan building or Safren House for about R85/m², which is about R25/m² more than a year ago," says Yach.  Property economist Francois Viruly says prices start rising once vacancies drop below 10%.

"But unlike other countries, we have large parcels of development land available in our cities and new supply can come on stream quickly. This could soften rents again."  Chait says the shortage of prime, zoned commercial land in good logistical nodes, together with increasing construction costs, will push rents of new developments to more than R120/m² in the next six months. 

But SA prime rents are among the cheapest in the world. They have a long way to go to catch up with rents elsewhere, which exceed R200/m². Tenants pay R800/m² in London's West End and R425/m² in Paris. 

Global office rental markets have started to improve after a period of overdevelopment and high vacancies, according to the latest global research by international brokers Knight Frank.  Average A-grade rents in the US, including small towns, rose last year by 1,7% to R155/m², though large cities are far higher. Vacancies are beginning to fall but average 17,2%. 

Knight Frank says Asia has been buoyed by outsourcing and the offshoring of call centres, with China, India and Thailand gaining the most. The Australian market is starting to recover from a cyclical slowdown that started in 2000. African cities are oversupplied, with soft but stable rents.