Western Cape Business News

Send  Share  RSS  Twitter  23 Jan 2011

PROPERTY: Office Vacancy Illusions


Recent Western Cape Business News

WHILE Cape Town property brokers generally report that a lack of demand is responsible for the reduction in office rentals to current levels and that vacancies still remain high, indications are, according to a recent office vacancy survey, that empty office space may have peaked.

But this picture of a peak may be skewed by sub-lets, which are becoming more common.

While unlikely to reflect on leasing schedules and vacancy reports, sub-lets are becoming increasingly prevalent in the commercial property market. Colin Harvey, director of Broll Cape Town, reports that sub-lets are becoming more widespread in the office sector, resulting from companies downsizing, consolidating or streamlining. In other cases, corporate mergers have resulted in premises becoming redundant as the companies integrate.

Even though these unutilised spaces are vacant, Harvey explains they are not necessarily reflected as vacancies as there is a lease in place and rental is being paid.

As tenants are challenged by consolidation, growth or change, it is essential to ensure that their property and occupation obligations are of optimal benefit to their businesses wherever possible, and sub-letting is one of the solutions which is proving helpful in the current market, as many companies are monitoring their bottom-line extremely tightly,” says Harvey.

Companies are required to honour their covenants over the space, regardless of whether they occupy the space or not. As a result it can make it difficult for the corporate to cut property costs when restructuring, even when securing a sub-let, for which landlord approval is required. Harvey points out that permission to sub-let cannot reasonably be withheld.

In some cases the lessee is required to make a rental contribution towards the sub-let space, as well as honouring their new rental obligation. “This is largely due to in-force rentals being above current market asking rentals.

In some cases asking rentals have rebounded from a high of R125/sqm to R95/sqm. As a result some rentals are ahead of the market as lease terms were negotiated at the top of the market,” notes Harvey.

Broll has already assisted a number of clients who hold leases over unutilised office space, in some cases covering entire buildings, by finding tenants to take over these rental obligations.

Rode & Assoc. also says this vacancy improvement might be illusionary because so many office buildings in the CBDs have been boarded up (i.e. taken out of the ‘space available for letting’ category), or have slipped from grade B into grade C (the latter category is not tracked by Sapoa).

Dave Russell of Baker Street Properties however believes that as there are very few office developments presently under construction, there is very little in the form of new stock coming on to the market. Low rental levels will therefore continue to restrict new office development, and with limited new space to add to the existing vacancies there is further reason to believe that vacancies have peaked.

At this time in the property cycle there is the opportunity for tenants to position themselves for the long term. If they take the time to investigate the leasing opportunities that are available in the market today, I am sure they will be pleasantly surprised at the quality of properties available on favourable lease terms. In fact it may be possible in some instances to rent ‘A’ grade office space for the same price that one is presently paying for ‘B’ grade accommodation.”

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