Soaring building costs slow down developers

SOARING building costs will probably prevent an oversupply of new office developments, and in turn create a positive office rental market in the short to medium term.

The booming residential market and government spending on public infrastructure projects are likely to increase building costs, making it difficult for viable new office developments.

Property economist Francois Viruly of Viruly Consulting says a feature of the office property market in the past was that when office rentals started increasing it led to overdevelopment and oversupply as developers moved into the market to supply new office properties. However, this time around this is unlikely to be the case, says Viruly.

With building costs increasing by at least 15% each year, it is less viable to develop office properties, says Viruly.

“There will be fewer new office developments entering the market next year, (and) there will be a severe tightening in the market. Rentals will start sky-rocketing in the office market and that will need to happen for them to stay abreast with the rise in building costs and supply not entering the market,” he says.

Public infrastructure projects which could total more than R350bn in the next five years will push building costs higher.

Viruly says SA needs to be careful that infrastructure projects such as Port Elizabeth’s Coega harbour development, Gauteng’s Gautrain and road infrastructure work, do not “crowd out” private developments and make it impossible for private developers to build anything because of high costs.

Dave Russell, a director of office and industrial property brokers Baker Street Properties, says rentals well in excess of R100/m² have already been achieved in Cape Town and that gross rentals of R120/m² a month for A-grade office space need to be achieved to justify the development of a new scheme in today’s market. He says there have been building cost increases in the past year of more than 20%.

“However, one thing is inseparable, if vacancies come down, rentals go up and if vacancies go up, rentals go down. That’s the cycle,” says Russell.

He says demand for Cape Town office space for, instance, had brought about a dramatic reduction in vacancies.

Russell says that, according to commercial property association Sapoa’s office vacancy survey for Cape Town, Claremont has seen vacancies in A grade buildings plummet from 32,3% in March last year to 5,3% presently.

Over the same period vacancies in A-grade offices in Rondebosch and Newlands reduced from 9,1% to 2,4%. Russell says that in September 2003 the vacancy levels in the Rondebosch and Newlands area was 19%. He says Cape Town’s central business district also continued to enjoy a “downward swing” in vacancies in A-grade offices. Vacancies reduced from 10,6% early last year to 5,1%. today, he says.

Article by: Nick Wilson - www.businessday.co.za