Office vacancies in the Sandton market are “likely to rise above 20percent” from the 17 percent level in July, according to one of the largest property groups in the country, Redefine.
It and Growthpoint say there are clear behavioural trends reshaping the market post-Covid-19.
Together, these two listed property Reits (real estate investment trusts) own nearly 10 million square meters of gross lettable space. This — and the fact that both have diverse assets spanning the retail, office and industrial segments (and across regions) — means they are good bellwethers for the broader sector.
Last week, Growthpoint reported financial results for the year to June 30, while Redefine held its pre-close investor roadshow at the end of August.
Redefine says that in the office segment “consolidation, down-sizing, business failures and remote working” continues to adversely impact demand.
“In addition, corporate restructuring is resulting in large amounts of sub-lettable space coming to market.”
Redefine expects vacancies to rise to as much as 2.544 million square metres across the country, which will see the national vacancy rate rise to 13.5percent, from 12.3percent in June.
Growthpoint says tenants remain “in a state of limbo with a nervousness to commit to new deals” but points out that this has the benefit of tenants wanting to stay in their current premises rather than move in this “uncertain environment.”
It says it is seeing an “increase in liquidations/business rescues with many tenants who were struggling prior to the lockdown unable to turn their businesses around”.
It adds that the full extent of the impact of Covid-19 and structural changes to the office and retail segments is unknown.
Both groups expect the trend of more business rescues, liquidations and tenant failures to occur in the retail sector as well, “which will increase vacancies”.
Redefine says because of Covid-19 and the “depressed economy, consumer behaviour is shifting at an accelerated pace to convenience”.
It believes “this is a structural change to consumer behaviour and spending patterns”. As far back as May (when it reported its interim results), Redefine made it clear that the “current preference of neighbourhood/convenience centres (was) becoming the norm”.
It cautions that “consumers may permanently change their preferred buying channel for certain categories toward e-commerce”.
It does say, however, that there was a “better than expected recovery in retail turnover, in particular apparel and fast food” post the hard lockdown.
Redefine says leasing activity is being driven by tenant retention initiatives and right-sizing retailers’ premises, resulting in negative rental reversions — in other words, lower rentals achieved for the same space.
Growthpoint says there is a trend towards short-term renewals at present, “with independents reluctant to commit and nationals taking advantage of the current environment”. It highlights the “value” category as best-performing, and has seen demand from value retailers at two of its malls in upper income areas.
Two further factors placing pressure on vacancies and rentals are “very little demand” for additional space from existing tenants, and “no new entrants”, says Growthpoint (The V&A Waterfront, which it reports on separately, remains resilient, with “an encouraging pipeline of interested prospective new tenants”.)
The days of Cotton On or H&M mopping up massive amounts of space are over, while unprofitable vacated Edgars and Jet stores that are not part of the business rescue transaction will weigh on many landlords.
Earlier this year, Redefine was blunt in its assessment of the market: “Struggling malls will no longer be relevant and possibly shut down.”
Growthpoint says its industrial “tenants are under pressure, particularly those that manufacture, tenants involved in the supply chain, and those dependant on the hospitality and construction industries”.
It says it has “seen many business failures” and expects many more tenants to “not make it.”
Redefine says Covid-19-induced “operational restrictions are driving warehouse reconfiguration and automation, including sectionalising merchandise, one-way traffic flow, and zoned shift-times for workspace and pause areas”. This could potentially see tenants look to reduce excess space over time.
It says there is pressure from tenants to sign shorter leases, and “market rentals remain flat while municipal tariffs continue to rise”.
It cautions that vacancies are expected to rise — “particularly in secondary nodes impacted by failing municipal infrastructures”. — Moneyweb.