AnalysisCommercial News

Sandton empty office space feeling the pinch as buildings reflect companies’ downsizing trend and competition from other areas — as well as the effect of long-term development planning

Behind Sandton’s empty offices

It’s 4pm on a Thursday, and 10 people are kicking a ball around a football pitch in the business hub of Sandton. It’s not this that is unusual; it’s that they’re doing it on the roof of their building — the R4bn, 87,000m² Discovery head office.

1 Discovery Place is something of a wonder. More than 5,000 people work in the financial services group’s head office. Other than the rooftop football pitch (and running track), its state-of-the-art features include a gym, restaurants, bicycle storage facilities, and a parking system that directs drivers to vacant bays. It’s said to be so expansive that a Boeing 737 could be suspended in the west atrium of the building without touching sides.

But the development of buildings such as this — arguably the most advanced office space in Africa — belies the parlous state of commercial property in Sandton.

The business node is home to many of SA’s large corporates, including FirstRand, Investec, Growthpoint Properties and Sasol, as well as multinational law firms such as Hogan Lovells, Bowmans, ENSafrica and DLA Piper.

It’s the most highly valued commercial hub in Africa — an “office city” that attracts commuting professionals. But it’s currently experiencing its worst office vacancy level in more than 20 years.

Will Harris, the CEO of commercial real-estate software and data services provider Gmaven, says 21.8% or 455,837m² of the total rentable 2-million square metres of Sandton office space is standing empty.

That’s about three times the 7%-8% level that analysts consider to be healthy, and almost double the 11% national vacancy estimate of the SA Property Owners Association (Sapoa).

The exact figure for Sandton office space varies, depending on who is collecting the data. Sapoa’s latest office report, released at the end of December, puts it at 18.6%, while global property services group Jones Lang LaSalle (JLL) has it at 16.8%.

The variance is a frustration for those in the sector, says Harris, given that “data is the oil that the commercial real estate industry runs on”. In part, it’s a result of how those collecting the data define Sandton and the vacancy factor.

Gmaven is the only one to explain its demarcation of Sandton (see map): the polygon that includes Sandton Central, Parkmore, Morningside, Barlow Park, Simba, Atholl, Wierda Valley, Chislehurston and Sandhurst. By the company’s measure, this 510ha area contains 282 office properties.

In turn, it defines vacancy as office space that is either vacant at present, or will be available in the next three months. (This corresponds with the minimum industry average of three months to finalise a lease agreement.)

Based on these measures, Harris concludes that one-fifth of Sandton office space is standing empty — and that excludes an additional 1,980m² that he says will become available three months from now.

The office market is going through changes as companies are starting to require less space per employee
But while the exact figures vary, there’s general agreement that office vacancies are on the rise.

JLL SA research analyst Omphile Ramokhoase, for example, points to a rise “from a low of 9.9% in 2016 to 16.8% at the close of 2018”.

Experts also agree that the vacancy rate in Sandton outpaces that of comparable commercial nodes. Sapoa, for example, puts the vacancy rate (as a percentage of the area available for leasing) at 11.8% for the Cape Town CBD and 9.5% for Umhlanga Ridge in KwaZulu-Natal.

The problem stems from weak economic growth and a glut of developments, coupled with corporate consolidation and competition from new commercial nodes.

In many ways, the property sector is a barometer for the health of the economy. So, given stagnant growth, it’s hardly surprising that Sandton’s office vacancy level is north of 20%. In fact, the last time vacancy levels were this high was in the late 1990s, when interest rates were around 24.5% and GDP growth was weak (SA’s economy grew at just 0.5% in 1998).

SA’s economic boom in the mid-2000s prompted large property groups such as Growthpoint and Zenprop to plan an assortment of developments in Sandton. By the time the 2008/2009 global financial crisis hit, it was too late for developers to pull the plug — so a large supply came on stream in the late 2000s.

This lag between real estate planning and actual development means the reality of SA’s stagnating economy is evident in rental numbers, if not in the number of new building developments coming on stream. Besides, says Growthpoint CEO Norbert Sasse, many landlords and developers have created buildings in Sandton with a 10-to 20-year view in mind.

According to JLL SA’s analysis, there was 984,000m² of premium-grade (P-grade) office space (rented and vacant) in Sandton by the end of 2018 — up 34% from 2017. And the expansion is not over yet. Ramokhoase puts the office development pipeline for the node at an additional 100,000m².

The result, she says, has been slower aggregate rental growth — though P-grade office space has proved more resilient, with an average vacancy rate of 6.4% in the fourth quarter of 2018.

Corporate consolidation has also had an effect. Discovery, for example, left five buildings vacant when it moved into its single head office early last year.

Similarly, law firm Bowmans and Old Mutual moved into larger single buildings, leaving vacant space behind. And the new companies taking up office space in Sandton have not grown to a size where they can command significant office space.

Then there’s the issue of competition. Experts say Sandton is under pressure from new nodes such as Midrand’s Waterfall City, and smaller nodes such as Rosebank, which have less traffic and cater better for pedestrians.

The last time vacancy levels were this high was in the late 1990s, when interest rates were at about 24.5% and GDP growth was weak

At the premium level, average rental in Sandton is holding its own at R225/m², according to Gmaven. This is lower than Rosebank’s P-grade average of R238/m², but higher than that of Cape Town’s business nodes, which are at R209/m² for Claremont and R182/m² for the CBD.

But at the lower levels, Sandton’s rentals are mostly down. A-grade office space is an average R145/m², against R181/m² in Rosebank, R148/m² in the Cape Town CBD and R169/m² in Claremont. By the square metre, B-grade office space is an average R123 in Sandton against R134 in Rosebank, R108 in the Cape Town CBD and R140 in Claremont.

Harris says investors and developers are keeping a keen eye on Sandton, because it’s a commercial hub — and that’s unlikely to change in the immediate future.

Some developers are already confident that office vacancies will ease in the next few years, as economic growth picks up again. This explains the number of new residential developments in the pipeline, including high-end development The Leonardo, and Acsiopolis, a 20-storey luxury apartment building in Benmore. Legacy Group, which has developed The Leonardo, says a large number of office workers have bought luxury apartments in the skyscraper.

But until such time as there’s an improvement, Keillen Ndlovu, head of listed property at Stanlib, advises that landlords need to be bolder and more creative with space they cannot fill.

“Unless we see good economic growth, it will take time to let most of the office buildings,” he says. “We believe that some opportunities exist for conversion into residential, self-storage, co-working and flexible office workspace. The office market is going through changes as companies are starting to require less space per employee, and hot-desking and/or ability to work from home will pick up over time.”

One of the buildings Discovery vacated when it consolidated — 155 West Street — is being repositioned to take advantage of this changing world of work. Its owner, Redefine Properties, has let 10,000m² to flexible workspace provider WeWork on a 15-year lease that starts in September.

It’s the second such deal for WeWork, which has also set up office space in Rosebank.