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Tuesday Nov 01, 2016

Economy's impact on office space bodes well

The impact of economic growth on office accommodation had resulted in a "positive move" that could gain momentum over the medium term, according to property services and investment firm Jones Lang LaSalle (JLL).

New offices under construction in Sandton.

The firm admitted the economy was not out of the woods yet with the year-onyear growth rate reported at a muted 0.7percent but referred to a combined third quarter 2.9 percent year-on-year gross domestic product (GDP) growth of the financial and business services industries, which were the main contributors to office demand.

JLL, in a report on the Johannesburg office market released yesterday, said employment in these sectors rose by a combined 1.9percent year on year in the third quarter.

It said notable office accommodation deals signed in Johannesburg in the third quarter included Merrill Lynch taking up 2000m² in Sandton along with an international legal firm occupying 1000m² in the same node and a number of tenants taking up smaller spaces of less than 500m² around the city.

JLL said overall stock supply in Johannesburg increased by 1 percent year on year in the third quarter.

It said although the SA Property Owners Association (Sapoa) reported that more stock had entered the market in the third quarter, at 2percent this was the lowest growth rate in new office supply in Johannesburg since the 6 percent growth in 2013.

It said office vacancies in Johannesburg had increased marginally to 11.8 percent in the third quarter from 11.3percent in the third quarter last year.

But JLL said most of the Johannesburg development pipeline would be completed by the end of next year and add 388 700m² of new office stock into the market.

It said the large non speculative proportion of these developments forewarned of a rise in vacancies and the slowdown in the development was therefore welcome.

In another report on the Cape Town market, JLL said many office completions had proved no threat to Cape Town's office vacancy rate and were indicative of stable demand levels.

JLL said there was a net take-up of 25 325m² of office accommodation in the third quarter, which contributed to a marginal decline in the vacancy rate that also alleviated any concerns of a looming oversupply in the market.

It said Cape Town had the lowest overall office vacancy rate in South Africa, resulting in limited options for larger office users.

The central business district (CBD) had seen office conversions to residential or upgrades to higher quality accommodation, resulting in the addition of new office developments not having a significant impact on overall supply.

"This partly explains the low vacancy trend in the absence of new occupiers while there has been an addition of new buildings," it said.

JLL said the overall vacancy rate in the Cape Town office market declined to 7.6 percent in the third quarter from 7.8 percent in the previous quarter, which was indicative of encouraging stability in the market. "With the Cape Town office market seeing relatively low vacancy rates, a slowing development pipeline and the strong interest in recently completed space, such as that in Century City, it is likely that vacancies will reduce even further over the short term."

JLL added that Cape Town's CBD remained of high interest to developers who were looking to convert office buildings to residential and other alternative uses.

"Should this occur, the city could see a shortage of office space as tenants move to accommodate such conversions.

"However, the caution of office developers remains justified without any clear sign of continued rental growth driven by new occupiers entering the market," it said.

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