By John Jack, CEO of Galetti Corporate Real Estate
South Africa’s office sector has been under immense pressure since the onset of the COVID-19 pandemic. However, recent data suggests a surprising turnaround may be underway, with several key indicators showing signs of improvement.
The latest SAPOA Office Vacancy Survey for Q1 2024 reveals a notable decrease in office vacancy rates across the country at 14.7%, down 50 basis points from the previous quarter. This marks the seventh consecutive quarter of improvement and is a sign of growing demand for office space in South Africa’s major metro areas.
The lowered office vacancy levels are the result of four key factors:
Real Rental Growth Decline:
While decreased vacancies are positive news for landlords, they have come at a cost – a decline in real rental growth. SAPOA’s report indicates a -6.2% year-on-year decrease in office rentals nationally, adjusted for inflation. Landlords are countering oversupply by offering substantially discounted rentals, flexible lease terms, shared workspaces, and investments in off-grid energy systems. While this may not be a financially viable strategy in the long run, it is clearly having its desired effect by drawing more people back to the office.
Increased Demand for More Affordable A and B-Grade Office Space
There’s an increasing demand for less expensive A and B-Grade office space as tenants seek to downsize from costly P-Grade buildings, as evidenced by SAPOA’s vacancy levels across these classes. While P-Grade offices offer luxury amenities, tenants are opting for more affordable options without compromising on quality.
Galetti’s data shows that the price per square metre for A-Grade rentals in the key Johannesburg business node of Rosebank is up to R100 cheaper than that of P-Grade office space in the same area. In Cape Town’s CBD, the gap is smaller, with P-Grade office space charged at around R35 more per square metre than A-Grade space.
The Continued Dominance of Cape Town
Cape Town has been instrumental in the recovery of both the commercial and residential property sectors, with SAPOA’s data illustrating its major contribution to improved national vacancy rates. Its current office vacancy levels are the lowest recorded since 2009, with the latest Rode Report finding that Cape Town was the only major node in the country to record above-inflation rental growth last year, at a rate of 10% for 2023.
Headline Inflation Easing
A decline in headline inflation is on the horizon, with the Reserve Bank projecting moderation to an average of 5.1% in 2024. Once headline inflation is curbed and interest rate cuts are implemented, major landlords will be able to capitalise on emerging positive trends, increase investment in the office sector, and mitigate the impact of external challenges like the energy crisis and municipal costs.
In conclusion, while challenges persist, the unexpected resurgence of South Africa’s office sector offers hope for landlords and tenants alike. By adapting to changing market dynamics and leveraging emerging opportunities, the sector is poised for a promising future.
