With 2.4-million square metres of empty offices in SA, experts expect that the trend to convert such space to residential use will gather momentum, particularly in outlying business nodes.
The October office vacancy survey from the South African Property Owners Association (Sapoa) paints a bleak picture for the office market, with vacancies now at a 16-year high of 12.7%.
University of Cape Town property economist François Viruly said that over the next two to three years there will be increased interest in the residential market and converting offices for this use.
And while top office properties in areas such as Sandton and Rosebank will "do fine", some properties in other areas won't recover even if the economy starts booming.
Citing the October Sapoa survey, which gave the 2.4-million square metre figure, Viruly said one of the issues office properties face is "structural obsolescence".
"It doesn't matter if the economy started delivering 5%-6% growth, that space would still be vacant in its existing use.
"You get three levels of obsolescence: physical, where the building doesn't look great, often from poor maintenance; functional obsolescence, where the building looks great but there is no parking or the building can't be adapted to new work practices; andeconomic obsolescence, where the building is fine but there is not enough growth to see anyone taking up space, or rentals are too low to secure a reasonable return."
He said obsolescence will encourage residential conversions and the development of mixed-use nodes, which could feature residential, retail and office space.
But at the same time new offices or premium-grade buildings that have been developed in, for example, Rosebank and Sandton, over the past few years will not suddenly sit vacant, he said.
As office rentals come under pressure, tenants will move out of lower-grade properties into the newer ones that will, due to economic circumstances, be forced to offer cheaper rentals.
"The market shifts upwards because of affordability and the gap between premium and lesser-quality properties widens. The issue is what happens to the marginal or older properties."
Property economist Erwin Rode, CEO of Rode & Associates, said the most likely candidates for conversion are old so-called grade C office buildings in secondary or tertiary locations.
Landlords realise their buildings there have become "near unlettable" and are willing to "accept a price that is low enough for a converter to make his viability studies work".
Residential conversions began about 20 years ago in the Cape Town, Johannesburg and Pretoria CBDs and this trend will start expanding to other office nodes, he added.
"It's a trend that will probably accelerate over the next few years because of the work-from-home trend and because the economy is staring a catastrophe in the face," Rode said.
In Atholl, Sandton, one recently completed development is the old Nampak building, now called Atholl Yards.
Marcus Susman, MD of Capstone Property Group, which converted the Nampak building, said the office-to-residential conversion trend began before Covid-19 because of the weak economy, and the pandemic will give it added impetus.
He believes listed property companies, which own the majority of SA's office property stock, will in time be forced by "protracted vacancies" to write down the value of their assets "to the point where they can either convert these buildings themselves or sell them onto a developer such as ourselves".
Atholl Yards was acquired by Capstone Property Group from listed property fund Fortress, which has in recent years been selling down its office portfolio to focus on logistics and other assets.
Susman said the Atholl Yards development includes 195 rental units whose rents range between R7,500 and R8,000 a month. It is aimed at young professionals working in Sandton and other areas easily accessed by the nearby highway.
Fortress CEO Steve Brown said his group has more than halved the value of its office portfolio from about R4.7bn five years ago to just over R2bn now.
But the group did not want to "give" its assets away and aimed to get the best value possible for the offices it sold.
Brown said the residential conversion market is growing but will be "marginal".
"The reason for that is I think you need a few factors to come right. You need the entry price for the developer doing the conversion to be correct.
"You also need to align with the location of the property.
"The Nampak building was in Atholl, which is an upmarket area . There was a lot of developer margin there to cover their cost and to provide some profit."
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