Johannesburg - Office vacancy rates in Johannesburg declined in the third quarter to 11.3 percent from 12.4 percent in the same quarter last year, despite the poor economic environment and additional supply coming into the market.
But property services and investment firm Jones Lang LaSalle (JLL) warned that office stock in Johannesburg was expected to increase by more than 400 000 square metres by 2017 and the slow growth in demand “suggests the market may be in oversupply within the next few years”.
“This is likely to caution developers against further speculative office developments around the city,” JLL said in their latest third quarter research reports on the Johannesburg and Cape Town property markets.
JLL added that given the strong correlation between employment and office demand in Johannesburg, it was expected that office demand would remain flat over the remainder of the year and into 2016 in line with the employment outlook.
But JLL said compared with the anticipated development pipeline, an oversupply in the Johannesburg market could be expected within the short term.
JLL added that vacancy rates were becoming notably different between central nodes and decentralised nodes, with centralised nodes attracting tenants to the city at the loss of decentralised nodes. It said the vacancy rate in Greenstone hit 26.3 percent in the third quarter, Morningside was at 19.8 percent with the exit of Aveng from the node and Rivonia at 18.5 percent.
By contrast, vacancies in Sandton declined by more than 15 000m2 and by more than 7 000m2 despite both nodes adding new office completions in the recent past.
JLL reported a willingness by tenants to pay a premium for high quality accommodation in Johannesburg. Although rental rates remained largely unchanged, premium grade (Grade P) accommodation showed a 5.7 percent rise in the average rental rate to R202m2, depicting strong demand despite the unfavourable economic climate, JLL said.
Rental growth
It said recent figures pointed to Grade P accommodation outperforming Grade A and Grade B accommodation despite the current economic climate, with Grade P vacancies declining to 3.9 percent in the third quarter from 5 percent in the previous quarter.
JLL added that Grade P properties started the year with declining rental rates and increasing vacancies, which had started to reverse in recent months despite greater possible anticipated demand for Grade A and Grade B offices as a means to reduce operational costs for occupiers.
It said the much stronger rental growth achieved for Grade P space, despite the market being in oversupply, may be driven by cost cutting by tenants because newer and higher quality buildings offered greater efficiency, resulting in long-term budget saving and reduced operational costs even at higher rental rates.
Turning to the Cape Town market, JLL said the sturdy growth in demand for office accommodation, including take up in speculative developments, was improving the long-term outlook of that market.
JLL said developments would be added to three major nodes, including the Cape Town central business district, Waterfront and Century City, all of which could be considered prime nodes.
It said the overall vacancy rate in the Cape Town office market increased to 9 percent in the third quarter from 8.2 percent in the previous quarter. It attributed this increase largely to the completion of speculative developments in Century City, which resulted in a 12.2 percent vacancy in the node from 6.6 percent in the previous quarter.
JLL said leasing activity would reduce vacancy rates in the next quarter once tenants who had just finalised leases had settled in.
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