Johannesburg recorded a higher percentage of office vacancies than the national average during the second quarter of 2023, as a sluggish economy resulted in reduced demand for space in the country's economic hub.
Though property owners continue to offer attractive tenant installation allowances and longer beneficial occupation periods for longer leases, subletting activity is diluting demand for existing vacant space.
According to the SA Property Owners Association’s (Sapoa’s) Office Vacancy Report for the second quarter of 2023, Johannesburg office vacancies reached a high of 18.7% from nearly 20% during the same period in 2022.
The Sapoa survey sample comprised 3,026 office properties across 54 nodes and 19-million square metres of gross lettable area (GLA) including developments currently under construction.
SA office vacancies, which peaked at a record 16.7% in the second quarter of 2022, were down 20 basis points quarter on quarter to 15.6% with 3-million square metres of vacant space from 3.2-million square metres in June 2022.
In 2003, office vacancies peaked at 15% and available vacant space was 1.6-million square metres, and in September 2019, vacancies had come down slightly to 11% with increased vacant space of 2.1-million square metres.
Sapoa said the growth in the size of SA’s office market coupled with positive long-term market rental growth has seen property owner’s loss of income escalate significantly even when adjusted for inflation.
On an inflation-adjusted basis, the average gross asking rental of available space is now at the same levels as 1999.
“Vacancy improvements are at the expense of income growth as asking rentals continue to trend down,” said Sapoa.
Despite oversupply, downward pressure on high-end rentals could see the flight to quality offices continue as occupiers continue to adjust real-estate footprint in line with their business needs, according to Sapoa.
The report shows that nationally, high vacancies, attractive rentals and subletting activity weighed on demand for new office developments.
Active development GLA across 54 nodes covered by the survey was 121,000m2, and Sapoa expects development activity to continue being mainly tenant driven and phased in the medium term.
Higher vacancies
Sapoa said that although Johannesburg recorded a slight reduction in vacancies, the figure was significantly higher than the 12.5% recorded at the end of 2019.
“Given the amount of development in the city over the last decade and increased asking rents, the current level of vacancy translates into a potential gross rental income of R2.8bn per annum,” said Sapoa.
During the reporting period, the City of Cape Town recorded the lowest office vacancy rate of 8.7% at the end of June — the lowest level since the start of 2020.
The Nelson Mandela Bay Municipality recorded the second-highest vacancy rate of 15.7%, followed by the eThekwini municipality (15.5%) and the City of Tshwane (12.2%).
In Johannesburg, Sapoa surveyed 25 nodes with different building categories including premium (P-grade), considered top drawer; A-grade high-quality offices; B-grade, which are generally older buildings with modern finishes in some instances, as well as C-grade buildings typically in fair condition but with older style finishes.
Over a nine-month period, some nodes have seen increases and reductions in vacancies, with only two nodes recording single-digit vacancy rates at the end of June. Greenstone saw vacancies reduce from 10.1% to 5.8%, and Milpark saw vacancies climb from 7.5% to 10.9% three months ago before falling to 8.8% as at end-June.
The 10 nodes with the highest vacancy rates include Johannesburg CBD (25.5%), Newtown (24.7%), Illovo (23.8%), Bedfordview (23.2%), Rivonia (22%), Bryanston/Epsom Downs (21.3%), Braamfontein (20.3%), Sandton (19.5%), Houghton/Killarney (18.1%) and Sunninghill (18%).
JSE-listed real-estate investment trust (Reit) Growthpoint Properties reported stable vacancies of 20.1% for the nine-month period to the end of March — below the 22.4% peak during the same period in 2022.
Paul Kollenberg, head of asset management for Growthpoint’s sizeable office portfolio, said there was growing demand for office space in the Western Cape, KwaZulu-Natal and Rosebank in Gauteng.
In Johannesburg, for example, he said leasing activity had resulted in vacancies falling from 45% to 24% in their Illovo portfolio — the node with the third highest percentage of vacancies in Johannesburg.
Kollenberg said they had a renewal success rate of just more than 63% based on GLA and not actual retained tenants, as some tenants negotiated a smaller footprint at lease renewal.
Growthpoint saw rental reversions improving slightly to -19.8% from the low of -20.7% at half year 2023 due to a negative reversion on 22,000m2. Excluding this renewal, reversions for the nine-month period would have been -10.8%.
“Despite improved leasing initiatives, large occupiers kept downsizing their office space, thus keeping Sandton vacancies at 27.3%,” said Kollenberg.
In its results for the year ended March, Investec Property Fund (IPF) reduced vacancies from 9.5% in March 2022 to 7.4%.
The company with 30 office properties valued at R5.4bn recorded 2.9% like-for-like net property income growth from +2.1% in March 2022.
IPF said oversupply of office space is resulting in negative reversions, while in the Sandton node, uptake of office space remains slow. However, the fund managed to sign new leases on nearly 4,000m2 of space during the last three months to year-end in March.
Emira Property Fund, with a portfolio of 20 office assets mainly P-and A-grade saw vacancies fall from 15% to 12.5% for the nine-month period ended March.
Refurbishments
In its pre-close operational update in June, Fortress Real Estate Investments office portfolio, which comprises less than 4% of group total assets by value, saw vacancies fall from 26.3% in December to 20.7% in May.
Fortress’s office portfolio was valued at R1.5bn in December with buildings mainly located in Bryanston, Rivonia, Sunninghill and Paulshof.
Fortress head of asset management Bruce Collins said though the office portfolio remained part of the noncore direct assets, the company continued to refurbish its existing office portfolio to fill vacancies and later sell for better value.
Refurbishment of buildings, especially those with high vacancies, has proved to be effective with half of the vacant space at Parc Nicol in Bryanston being let, with an offer to purchase received for the Fourways Office Park property.
“We are experiencing demand for our offices as many occupiers looking for buildings with backup power are taking up space in some of our buildings,” Collins said.
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