By Kevin Rawnsley

IT always takes a little time for the message to sink in that the market for commercial office space is changing, especially when the market is firming.

After all, the property industry has a global reputation for optimism and positive perspectives. However, in South Africa at the moment there is good reason to believe the market is undergoing a fundamental change and demand for office space is on the rise.

This is reflected in the statistical picture and realities on the ground. For example, a Johannesburg-based developer such as Barrow Properties & Construction is currently busy with the construction of buildings in three office parks, each of between 700m² and 1000m².

Paul Barrow, a director of the company, says, “The market has firmed up”. Rentals are starting to climb and a shortage of land zoned for office development is starting to emerge. He expects demand to climb further and after a prolonged downturn is excited about prospects for the new Barrow office park developments as they come on stream.

A similarly upbeat tone is struck by Carl Jankowitz, a director of Equity Estates, a company which is developing two new office buildings at the Country Club Estate, Woodmead, creating an additional 6000m² of prime office space. This is the first office development undertaken by Equity Estates in FIVE years, yet the company decided now was an opportune time for speculative activity.

Carl Jankowitz says “good economic returns are available” in today’s market and is confident of strong demand. He points out that both building costs and rentals are moving higher. He also believes demand-side pressure could mount.

When marketers talk up the market, that’s one thing. But when mid-size companies invest in speculative developments they are actually voting with their balance-sheet. You have to respect that.

My conclusion? The market in office space has already started to firm and we can expect strong demand to continue for some time to come.

What does this mean for businesses that have to plan their office space needs for 2005, 2006 and beyond?

I believe the market change will trigger a reappraisal of strategic office planning on the pattern which emerged in the USA in 2000-01 when the long equity bull run came to an end, when the DotCom bubble burst and many US businesses had to aggressively manage margins, cut costs and seek new efficiencies.

The efficiency fixation not only included staffing and processes, but property. Corporate property portfolios were revisited and long-term cost implications were re-examined.

The result was a new approach to the office. Every option was reviewed and in the end every option was endorsed.

Outright ownership was embraced, usually as the No. 1 option for head offices or key operations where the base was established and continued, long-term growth was expected.

Leasing was preferred in regional operations and for activities that were fast approaching critical mass, but had not totally matured.

Office outsourcing and flexible office solutions were selected for branch offices, project teams, start-up enterprises, JVs with new partners or initiatives in dynamic, fast-changing sectors.

As a result, most companies developed a balanced strategy that covered all the bases. Portfolios were adjusted accordingly.

I foresee a similar pattern of reappraisal and re-adjustment in the local market.

The dynamics of a firming office space market will come as a jolt to businesses that for the last five years have grown used to wringing concessions from landlords and receiving value-added extras.

Short leases with options to renew on favourable terms may have been available a year ago. Today, the chances are the landlord will be looking for a longer contract at higher rentals.

This is understandable. Firming markets have that effect on landlords.

In response, companies would do well to follow the US precedent. Develop a firm office strategy first. Look at the options and the cost implications. Decide where flexibility is vital and where a more permanent arrangement is desirable.

Negotiate in accordance with a strategic view of your office needs. There is no need to place one big bet on one single approach.

Buying, leasing and outsourcing have ceased to be an either-or proposition. Each has a role. Each delivers a unique set of advantages. The challenge is to derive maximum advantage from each in turn for optimum portfolio performance.

This challenge will crystallise as never before as the property market firms in the second half of the year and into 2006.  

• Rawnsley is CEO of Regus Southern Africa, local subsidiary of Regus Group plc, the world’s leading provider of serviced offices and on-demand workplace concepts.

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