Shiny new offices cannibalise old
Rosebank to Sandton, landlords chase same static pot of tenants
Sandton’s CBD seems to be getting shinier each year as gleaming glass towers sprout on every corner, but there are concerns about oversupply in the market as other office nodes in Gauteng become equally appealing to businesses.
The Sandton CBD has seen a flurry of developments over the past few years as companies and leading law firms moved into the high-rises of South Africa’s economic hub.
High-profile developments include Discovery’s swanky R3.7-billion headquarters on the corner of Rivonia Road and Katherine Street. Discovery Place, in which Discovery has a 15-year lease, is 55% owned by Growthpoint with the balance held by Zenprop. Sasol’s futuristic R2-billion development, also on Katherine Street, is owned by the Sasol Pension Fund and Elixir Trust.
The Sandton office market had a vacancy rate of 15.9% in the first quarter of 2018, the highest level recorded for the node since 2014, according to real estate consulting firm JLL. The group said the vacancy rate in Sandton had grown 1.9% from the previous quarter, while on a year-on-year basis the vacancy rate increased by 6.9%.
One high-rise building that will be adding office space to Sandton is The MARC, a mixed-use development that includes two office towers on the corner of Maude Street and Rivonia Road.
MMI Holdings was due to occupy one of these office towers as its primary head office, as part of its plan to consolidate its various offices. But MMI recently said it would maintain its primary head office in Centurion.
MMI chief financial officer Risto Ketola said the company decided to build and occupy the building in 2015, a time when MMI had had three years of good earnings growth. Ketola said MMI had plans to expand geographically and expected higher growth in headcount. But instead the group experienced slower-than-expected growth in its domestic businesses.
“Our need for office space is thus significantly lower now than what was planned in 2015. It does not make sense to take up occupation of The MARC building if it will result in high vacancies in existing buildings and additional financial costs, and cause employee disruptions. We believe that both shareholder and employee interests are best served by our decision,” said Ketola.
The group is considering leasing the building to a single occupier or several tenants, and regards the property as an investment. The MARC is rated P-grade — topquality, modern spaces. This grade has the lowest vacancy rate in Johannesburg, at 5.4%, although even in that grade vacancies have increased 2.7% compared to the same period in 2017.
The vacancy rate for Johannesburg office space increased slightly, to 12.9%, in the first quarter of 2018 compared to 12.6% in the previous quarter, according to JLL. This is the highest vacancy rate recorded since 2010.
Overall, Johannesburg has 10 168 512m² of available office space, with an additional 403 885m² in the development pipeline.
Craig Smith, head of research at Anchor Stockbrokers, said the increase in vacancies was a result of increased supply in an environment with very little new demand for aggregate office space.
Smith said the issue in Sandton was the concentration of vacancies within A-grade buildings (not older than 15 years with highquality modern finishes) and B-grade office buildings, which are generally older buildings with rents in the middle of the price range for the area.
“What has largely happened is that tenants have vacated their A- and B-grade properties in Sandton and moved into [new] Pgrade office buildings in Sandton,” he said.
Sandton has 1 840 987m² office space, of which 293 320m² is vacant. Most vacancies are in A- and B-grade office accommodation. P-grade accounts for just over 55 000m² of available office space in Sandton.
The vacancy rate for B-grade was recorded at 34.2% in the first quarter, which has over the past few years pushed up the overall vacancy rate in Sandton. While the rate for Pgrade office space is relatively low at 6.3%, on a year-on-year basis it has recorded a noticeable increase of 2.8%, which indicates that while P-grade space is more attractive, it is also coming under pressure.
One factor in the high vacancy rate is the fact that companies are not hiring in high numbers as the economy in recent years has not been supportive of employment growth.
Smith said because of poor growth, demand for aggregate office space hasn’t increased in real terms, which has meant that the A- and B-grade properties that were vacated have often remained vacant.
He said the theme in the office sector globally and in South Africa was around consolidation or higher productivity of office space — meaning more people in the same space. Because the structures of older buildings are less suited than newer P-grade buildings to consolidation and the shift to open-plan offices, there is less demand for A- and B-grade office buildings by large corporations.
“In a slow-growing economy, developers and landlords are competing for a pool of tenants which isn’t necessarily growing and this often results in pressure on development margins and rental rates,” Smith said.
Lawrence Koikoi, a listed-property analyst at Stanlib, said Sandton remained an attractive node.
Over the past few years Sasol has moved from Rosebank and Randburg, Webber Wentzel moved from Illovo, and Discovery, Bowmans and Old Mutual have all built larger headquarters in the Sandton CBD.
Koikoi said this was due to the types of business situated in Sandton — top law firms and banks — and to the fact that the area has the infrastructure that makes it a central node.
Sandton was facing some competition from the Rosebank and Waterfall nodes, which account for 27% and 25% of the city’s development pipeline, respectively, although Sandton remains on top at 37%, said JLL.
Omphile Ramokhoase, a research analyst for sub-Saharan Africa at JLL, said while all three nodes are highly sought-after locations, Sandton’s challenge with traffic congestion has forced many companies to look for alternative areas that offer the same amenities and top-quality offices — such as Rosebank and Waterfall.
Ramokhoase said another factor that companies consider is proximity to employees’ homes, the convenience of shopping amenities and whether the location fits in with the company’s corporate culture. Rosebank, for instance, is seen as a less corporate, trendier node, compared to Sandton.
Our need for office space is significantly lower than what was planned in 2015
Risto Ketola
MMI chief financial officer