Developers catching office scarcity wave

SOUTH African developers appear to be strongly confident about office property market fundamentals, with close to 60% of new office developments in decentralised nodes undertaken on a speculative basis.
Property economist Francois Viruly of Viruly Consulting says the market scenario is that office vacancy rates are at 10-year lows in decentralised nodes virtually across the country.

“I am picking up strong evidence that developers are reacting to this, with building activity being on the rise.

“Developers must clearly have an upbeat view on the fundamentals in the property market and this is illustrated by the fact that close to 60% of office developments being developed in decentralised nodes are on a speculative basis,” says Viruly.

There are specific nodes such as Sandton where speculative development is as high as nearly 80%. “This means developers are taking the view that the office market will continue to strengthen in the next 24 months and this new space can be let.”

But Viruly says that in some nodes, the development activity is in line with the forecast demand for space.

“There is a risk in, for example, Sandton that we could well see some overdevelopment.”

But he says the market is developing sufficiently to keep up with demand.

Viruly says office vacancy rates are below 5% in certain nodes. No market reaches a zero vacancy rate because there are always tenants “on the move” and creating vacancies.

“I would say the average natural vacancy rate is around 7% to 8%. At the moment we are below the natural vacancy rates.

International studies suggest that in this kind of scenario, rentals start increasing at a faster rate than inflation,” says Viruly.

Property economist Erwin Rode of Rode & Associates says he is “slightly worried” that developers are “ahead of the market” in places such as Sandton

He says this especially applies to those cases where evidently the buildings are being developed on a speculative basis.

“But fundamentally we are in the beginnings of a long upswing phase for offices. Things should turn out well in the end,” says Rode.

David Green, MD of commercial and industrial property brokers Pace Property Group, says there is a risk of overdevelopment of office space.

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