The industry has answered the call for flexibility and innovative strategies, but the third wave of the COVID-19 pandemic has key industry players asking: “where to from here?”
A few months ago, commercial real estate was seeing clear signs of a return to ‘normality'. Employers of both corporates and SMEs were well on their way to introducing a hybrid model that saw employees coming back to the office a few days a week.
Certain outliers indicated not only recovery but growth, as there was ongoing demand for industrial properties - largely due to the e-commerce and storage sector - and retail was showing strong signs of recovery.
But now, with lockdown and economic uncertainty, many are unsure of what the next move is.
“Failure is not an option for our sector,” says John Jack. “We are continuously finding new ways to fill space and to meet the demand of both landlords and tenants.”
As many commercial property owners and tenants look to short-term fixes for the current damaged state of the industry, real recovery may only be possible by examining the root causes of the sector’s downturn.
Four challenges that the commercial real estate sector will need to overcome to fill offices again:
1. Excess office supply. “Excess supply in previously sought-after business districts such as Sandton places downward pressure on this node.”
2. Overcapitalisation. “During the World Cup in 2010, the sector experienced a boom in demand for commercial real estate – particularly in Sandton - largely due to the introduction of the Gautrain. Unfortunately, many of these offices are now bare and it appears that many overcapitalised.”
3. Downscaling. “Many companies are downscaling or opting to sublease some of their office space, causing landlords to lose out.”
4. Landlord incentives. “Incentives to attract and retain tenants had the industry battling it out and losing significant margins – we’ve seen companies renewing office rentals at 20 to 30% discounts.”
“We anticipate excess supply and significantly lowered rental rates to plague our sector for at least the next two to five years. But industry players are realising we need to get creative.”
Time to get creative
As an example of a creative approach to leasing, Galetti recently found a 5-year lease for the iconic Media24 building in Cape Town by looking for efficiencies across the company’s portfolio.
“We found that we could consolidate Media24 into a smaller footprint in the building, enabling us to work with several companies to find a suitable sub-tenant. This creative use of office space is a win-win for both tenants and landlords and will become a major trend as the year continues,” John explains.
Road to recovery
Galetti believes that the current, depressed state of the commercial real estate sector could be a turning point for long-term recovery.
Our sector has been privy to pressure for years - industry players will need to rise to the challenge to turn things around
“Our role as businesses is to create employment and grow bigger sustainable businesses that will provide a future for the people of our country. Reinventing and reinvigorating our economy is something that everyone should be assiduously committed to,” John concludes.