Sandton office vacancies outstrip Johannesburg CBD

For the first time in 30 years, prime office node Sandton has higher vacancy rates than the Johannesburg CBD as oversupply, a weak economy and the pandemic leave more space idle.

At more than 20%, office vacancies in Sandton outstrip those in central Joburg, which began to change in the 1990s as businesses fled spiralling crime and urban decay.

Property economist and University of Cape Town professor Francois Viruly said this is the first time this has happened since the early 1990s.

He said the oversupply of office space in Sandton spurred by companies seeking new premises is largely to blame, and a weak economy resulting in a shrinking corporate SA has also played a significant role.

Viruly said the pandemic, which has resulted in many professionals working from home, has exacerbated the situation, but perhaps to a lesser extent than imagined.

The latest vacancy survey for the second quarter of 2021 from the South African Property Owners Association (Sapoa) shows that Sandton’s vacancy factor across various office grades is now on average about 20.7%, compared with about 17.5% in the Johannesburg CBD.

National office vacancy was 15% for the second quarter of 2021, “matching the alltime high recorded in March 2003”, says the report, which was released in June.

Viruly said office space in the Johannesburg CBD has been converted to other uses, such as residential, and its office market is smaller than Sandton’s. The two locations are thus not comparable, but “from a purely supply and demand fundamentals perspective, the CBD has a stronger office market than Sandton”.

This is not surprising, he said, as 60% of new office developments occur in Sandton, Rosebank and Waterfall. Elsewhere in SA there is not this level of development, resulting in more stable vacancy rates at the moment. The “very high rise in P-grade supply” driven by corporate tenants means existing A- and B-grade office space is emptied out — some of it in the same areas where new offices are erected.

P-grade are new flagship premises, and A-grade space is relatively new, with highquality finishes. These segments generally enjoy the strongest demand. B- and C-grade premises are older, lower-quality properties.

Viruly said vacancies in the Johannesburg CBD are still high overall, but they have declined over the years if they are broken down into various office grades. A-grade vacancies in the CBD are at a mere 3% from 22.5% in 2002, and B-grade vacancies are at 24.4% from 34.4% in the same 19-year period.

He said growing interest in the “inner-city residential markets offers further opportunities to re-purpose properties to other uses and further decrease vacancy rates”.

Anchor Group CEO Peter Armitage said the surge in new developments in Sandton in recent years has been driven by “all the big banks, legal firms and accounting groups wanting to build brand-new headquarters, leaving behind empty offices”.

As for the effect of the pandemic, Viruly said “it must be remembered that the South African economy has been in a cyclical downturn since December 2013, which has negatively impacted on demand”.

This is borne out by the 17.8% average vacancy factor for all Sandton office grades in the second quarter of 2019, long before the pandemic, according to Sapoa data.

Growthpoint Properties, SA’s largest listed property company, which this week reported annual results for the year ended June 2021, confirmed that Sandton has the highest office vacancy rate in SA.

Speaking at the results presentation, Growthpoint’s SA CEO, Estienne de Klerk, said the group’s Sandton office assets, which make up 21% of its local office portfolio, have a 25% vacancy factor. But, even though there are double-digit vacancies across SA, De Klerk said, the group’s Cape Town and Durban operations have much lower vacancies at about 14% and 11%, respectively.

In an interview, he said: “Corporates aren’t hiring new staff and there is more attrition than there is employment. That is probably a bigger impact than working from home. What is really hurting us is what is going on in the economy and at the moment we really can’t dodge that bullet.”

De Klerk said he believes the Sandton vacancy factor in general is “probably closer to 30%”. The Sandton vacancy rate is compounded by big companies looking to sublet space on which they still have leases.

Chris Renecle, MD of Johannesburg developer Renprop, agreed that office vacancies in Sandton are probably in the 30% range. He said total unoccupied space in Sandton, including workers not in offices at present, was “more like 80%”.

Armitage said that “if you average it out”, big companies in future are probably going to aim to give up a “third of their space” as lease agreements come up for renewal.

Growthpoint group CEO Norbert Sasse said there are some “green shoots” with the recent re-benchmarking of GDP showing the economy is 11% bigger than previously recorded, and improved revenue collection by the South African Revenue Service.

De Klerk pointed to the booming mining sector, which has “created a positive trade surplus” for SA, and said it is hoped this growth will start “spilling over” into other parts of the economy and in turn stimulate the office market.

Renprop’s Renecle is optimistic about office workers returning to Sandton and other nodes as vaccinations ramp up.

But others warn of a structural shift in the office market that will lead to a lot of space becoming obsolete.

Viruly said some space is structurally obsolete, “where people just don’t want the space because it does not meet the needs of modern work practices. It doesn’t matter if you get 10% GDP growth, that space won’t be taken up. That is where the problem lies.”