The property landscape, which was severely hit by the national lockdown imposed to contain the spread of the coronavirus, is set to undergo major changes as landlords struggle with the largest vacancy levels in history.
The pandemic has proved that people can work from home if they have to — and that employers can save a lot in office space as some of their operations were minimally affected.
Faced with an economic environment in which they might have to cut costs to survive, office space could easily become low-hanging fruit for those whose employees managed to continue smooth operations from home.
According to the SA Property Owners Association (Sapoa), there are 2.4-million square metres of empty office space in SA. This is according to the organisation’s latest office vacancy survey that puts vacancies at a 17-year high of 13.3%. In a healthy, growing economy, the national office vacancy rate should sit at about 7%.
However, Growthpoint Properties CEO Norbert Sasse, whose company is the largest landlord in SA with an exposure to R157bn worth of property across SA, the UK, Poland, Romania and Australia, said there is still life after the lockdowns.
He said only certain employers, mostly in the small and medium enterprises sector, are expected to continue working from home and to make it a permanent fixture.
Speaking at the company’s half-year presentation last week, Sasse said he is confident that corporates will remain loyal to landlords and send their staff back to the office when it is safe to do so — but the industry will also have to adapt to the new normal.
The company has been successful in converting an array of office stock to apartments, which has helped the group double its residential portfolio
— Justin Brand, director of Africrest Properties
Sasse said he saw a record number of tenant failures in 2020 and many category B and C offices left empty across SA. Sapoa grades office buildings with premium-grade (P) offices the highest quality modern space, the A-grade a tier down, and B- and C-grades for those that are 15 years and older.
These high levels of vacancies have prompted landlords to find creative ways of converting the empty space into business opportunities, such as laundromats, car showrooms, housing and medical suites.
Michael Scott, research analyst at real estate advisory firm JLL Sub-Saharan Africa, said many property owners would rather change how space is used than demolish their assets and build new ones.
“The traditional office model as we know it is evolving towards one of a hybrid nature. We are seeing serviced offices, satellite working partner offices, home set-ups and all kinds of other things,” he said. “We should start to see these trends in larger international markets, such as New York, London and Tokyo. In these places, public-use laundromats and cafés within office buildings that the public can use, as opposed to canteens for all the staff in these offices, are becoming more common.”
A large amount of office property is also being converted into apartments and housing.
Sandton is a business node that stands out for conversion given how it is being strangled by high office vacancies. According to some analysts, a third of the Sandton node may be vacant.
Nick Katsapas, a property developer, has been at the forefront of office-to-residential conversions in Johannesburg, and says SA’s office sector is in for a world of hurt. “It’s been a perfect storm for offices in SA with a very weak economy and Covid-19. The rule of thumb is that you need GDP growth of at least 3% or vacancies will rise.”
He said the definition of a vacancy has also been challenged as, in some cases, you will find 10 staff members occupying a building and not paying rent.
“Landlords want to hold on to tenants like this and give them a chance to recover after the pandemic. I think you will see that Sandton will continue to be hard hit by rising vacancies,” he said. “For me, the two best conversion trends will be to turn offices into residential and educational spaces.”
One unlisted group that has been involved in office-to-residential conversions is Africrest Properties, which owns, redevelops and manages office, retail, industrial and residential property.
Director Justin Blend said the company has been successful in converting an array of office stock to apartments, which has helped the group double its residential portfolio in less than a year. It now manages a 2,000-unit residential portfolio, valued at just over R1bn.
“Residential property has proved to be very resilient in the pandemic with South Africans understanding the importance of paying rent and keeping a roof over their heads amid the chaos of lockdowns,” he said.
“I think the key with conversions is that you understand they can cost a lot and not every building is worth converting.”
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