Office rentals rock

Soaring building replacement costs are pushing up office rentals and they are forecast to go higher, partly due to demand in line with the current low vacancy rate. In terms of rentals, A+ grade offices in Gauteng lead the pack, followed by Cape Town, Pretoria and Durban.

As a result of these low vacancies, says the latest Rode Report, many tenants signing new leases find themselves entering into contracts at market rental rates close to or in excess of the rental rates required to make new office developments viable. "To make a new office development work," says the report, "a developer would require a gross market rental of approximately R140 m²/month."

Replacement and building costs soar

Currently, market rentals in some of the premier decentralised nodes such as the Sandton CBD are moving towards that level. Meanwhile replacement costs continue to soar in line with building costs. These may settle, though, as interest rates and the moratorium on electricity certificates for new developments start to bite.

In the first quarter of the year rentals in Johannesburg decentralised were up by 16 percent compared to 15 percent annual growth last year in Pretoria and Cape Town. Poorest growth was in Durban with two percent. In contrast, building cost growth, as shown by the Bureau for Economic Research, is expected to have grown by 20 percent. Only office rentals in Sandton, Rivonia and Parktown recorded yearly growth rates at these levels. In other top Johannesburg decentralised office areas such as Bryanston, Randburg/Ferndale and Illovo, rental growth was reasonable but short of the expected growth in building costs. In Cape Town, only Century City (+24 percent) could outperform building cost inflation. However, says the Rode Report, in the office nodes of Claremont and Tyger Valley nominal rentals were nevertheless on average still up by a remarkable 19 percent and 10 percent respectively. In Pretoria, Centurion alone outperformed building cost inflation with 25 percent nominal growth. Menlyn and Hatfield followed, growing by roughly 15 percent. In Durban’s foremost office node of La Lucia Ridge, rentals were on average 15 percent higher than a year ago. In Berea, growth of 18 percent was attained.

CBD office rentals paint a slightly different picture. During the second quarter of this year nominal rentals in the Pretoria CBD grew by a phenomenal 48 percent, says the report, adding: "Logically this can be attributed to the exceptionally low prime office vacancies and government’s commitment to remain in the Pretoria CBD. Regarding the other CBDs, rentals in Cape Town were 28 percent higher than a year ago, followed by Johannesburg (+22 percent)."

Practically a fully let market

Rode’s editor, John Lottering, comments that vacant office space remains a rare commodity with virtually all of the current prime office stock in the decentralised nodes being fully occupied. He adds: "Based on the latest data more than 95 percent of the total rentable area in these areas is taken. From a practical point of view, this is equivalent to a fully let market."

For example, in Cape Town decentralised vacancies in Rondebosch and Newlands were a minute 0.5 percent. However, in Claremont they ended the second quarter at 3.7 percent.

Meanwhile industrial land values continue to outperform just about everything — in spite of taking a bit of a breather from what in some cases have been triple-digit growth rates. In Durban, stand values grew 69 percent in the second quarter, the Central Witwatersrand 62 percent, the Cape Peninsula 49 percent and Port Elizabeth 16 percent.

Published courtesy of IP Magazine

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