New property statistics back up claims by a top economist and magistrate that the decay in the Durban inner city is driving professionals away from the CBD.
The Rode Report for Q3 2022 was published at around the same time that economist Bonke Dumisa told his Facebook audience that he was closing his private Post Office box at the Durban Main Post Office because the building is now “literally both a security risk and a serious health hazard.”
He said almost all its exterior elevations (sides) were so dirty and decayed that it would make one puke.
Read our latest Property360 digital magazine below
In the same message, Dumisa complained about never-ending roadworks that took months to complete and said many professionals were moving their offices away from the Durban city centre.
In the report, Erwin Rode of Rode & Associates, says property brokers unsurprisingly perceive the Durban CBD as the node with the highest vacancy rate for grades A+, and A and B office space combined, in the third quarter of 2022, at just above 20%.
The vacancy rate for nodes outside the CBD, in other words decentralised space, however, lifted slightly to an average of 11.6% compared to the second quarter.
“The node with the lowest vacancy rate in Durban is Hillcrest‐Kloof at just below 10%. The largest decentralised node in Durban is La Lucia Ridge/Umhlanga, where vacancy rates average about 11%.”
Cape Town
The Cape Town decentralized vacancy rate for grades A+, and A and B office space combined in the third quarter of 2022, decreased slightly to an average of 15.6%.
He explains: “To give some perspective, the vacancy rate was 17% a year ago. Encouragingly, all the major nodes now have average vacancy rates below 20%. Vacancy rates improved in Claremont Upper, Century City and Tyger Valley. Vacancy rates were the lowest at the V&A Waterfront at about 10% – the pacesetter node in Cape Town.”
Johannesburg
The Johannesburg decentralized vacancy factor for grades A+, and A and B office space combined, in the third quarter of 2022 was 15.8%, the highest of the major cities. This means vacancy rates improved further after peaking at 20% in the first quarter of 2022.
“Even with the slight improvement, it is still significantly higher than the 12% pre‐Covid average in 2019 as per SAPOA data. Most of the major nodes saw vacancy rates improve from elevated levels, with Parktown the notable exception.
“The Johannesburg nodes where brokers perceive vacancy rates for grades A+, and A and B space combined, to be the highest are Parktown (24%), the CBD (20%), Illovo Boulevard (20%), Sandton, Bedfordview, and Hyde Park (all 19%).”
He says Sandton, the largest office node in South Africa, saw its vacancy rate improve slightly from 20% in the second quarter. However, to put it in perspective, the empty office space in this node alone totals about 406 000 square metres, which in terms of magnitude is close to the whole Gross Leasable Area of Randburg or Century City.
National outlook
Owners of older office spaces will need to consider restructuring their properties for other uses, and not just convert them to residential units.
This is because the residential property market is also under pressure as a result of lower economic growth and rising interest rates.
Rather, states Rode, they should consider converting their B- and C-grade offices into educational, religious, medical and storage spaces – but only where it is financially and practically feasible.
The results of Rode’s office vacancy survey show that the national decentralised vacancy factor for grades A+, and A and B combined, stood at 13.8%, down from 14.7% in the beginning of 2022.
“This small improvement is encouraging, but looking at the bigger picture, vacancy rates are still well above the 10.5% average of 2019 before Covid hit South Africa, and well above the long-term average of about 9% (SAPOA data),” he says in the Q3 2022 Rode Report.
“A long‐term vacancy rate of 9% has an important implication when valuing prime office buildings. It is dead wrong to assume that even if an office building is near fully let at the time of valuation, this will persist in perpetuity.”
Rode explains that the rule is that the older the building (the lower the grade), the higher the typical vacancy factor. This is especially a problem at present as tenants in grades C and B tend to upgrade to A because market rentals of A‐grade office space are so low in real terms. Apart from the cost factor, some tenants are relocating to newer offices because of their excellent amenities.
“In practice, this means landlords are generally seeing higher vacancies in older buildings and lower vacancies in newer buildings (see chart), but with negative rental reversions. Thus, you don’t want to own old office buildings – unless you can buy them at a bargain‐basement price with a view to conversion.
“The higher cost of conversion − due to the double‐digit rise in building costs will hold back conversion projects in the short term.”
Search for office property for sale at IOL Property.
IOL BUSINESS