- Redefine says the 14.7% vacancy rate in its office portfolio is the highest in its recent history.
- The landlord has also received requests from four big tenants who want to downsize their office space.
- It is considering converting some existing offices into co-working spaces and bring in amenities such as childcare facilities, laundromats and coffee shops to its office buildings.
Redefine Properties has experienced the highest vacancy rate in its office space - at 14.7% - since its formation in the early 2000s.
The company - which owns a considerable number of office parks in Sandton, Rosebank and Bryanston, to mention a few - recorded vacancies that were higher than the national average of 13.5% as at December 2020, when excluding sub-lettable space.
Some buildings have much fewer people occupying them. For instance, 155 West Street was only 26% occupied and Redefine has decided to move its headquarters there from Rosebank to help fill that property to 100% of its capacity.
But then, it will be left with another empty building: Rosebank Towers.
However, Redefine CEO Andrew König is confident that Rosebank Towers will be snatched up quickly because there is already a lot of interest from tenants.
"We don't yet have a tenant for the space. Although I must tell you that there is a lot of interest in the space and we still remain confident that we'll be able to re-let the space at substantially more than what we are going to be foregoing at 155 West Street," said König.
The problem of increasing office vacancies has been a headache for landlords for a few years now.
Highest office vacancy rates in history
The South Africa Property Owners' Association's (SAPOA) office vacancy reports show that unoccupied spaces have been above 10% since the third quarter of 2011 and have been steadily increasing every year since then. But since the second quarter of 2020, this has accelerated as some smaller businesses may have shrunk their workforce or collapsed due to Covid-19.
"The 14.7% is certainly the highest that I can recall, possibly the highest in the history of Redefine, other than perhaps when it was formed back in the early 2000s. It's been pretty stable since year-end," said Redefine outgoing chief operating officer, David Rice.
However, said Rice, "shadow vacancies" – space that is occupied but not used or underused by the tenants – were difficult to gauge because it can be sub-let by corporates and is not indicated in Redefine's own vacancy rate.
But it's not just smaller tenants who are giving up their office space, even large corporates are reconsidering as more people are likely to work from home on a more permanent basis.
Rice said the company has four large office tenants who are looking to downsize their space. Fortunately for the company, they are not cancelling entirely for now because they have long-term leases to honour.
Time to change gears?
Even though, like other landlords, Redefine is working around the clock to retain office tenants and says its balance sheet is in a stronger position to weather the Covid-19 storms after the disposing off some non-core assets, there is a realisation that something has to change to make office assets more resilient.
The company is putting in place additional amenities and plans to redesign more office spaces, including converting some of its buildings to co-working office space in future. Redefine already has WeWork as a tenant in a few of its buildings, including The Link in Rosebank and 155 West in Sandton.
"We see it as an opportunity for growth in the future. What we would do is [to] remodel existing offices," said Rice
The company is also investigating the feasibility of converting some office space into self-storage units. Furthermore, the company is seeing an increased demand in fully converted and fitted office suites and is looking at bringing additional facilities to keep and attract tenants.
"What we are looking to do with the office properties is to offer the widest amount of amenities that we possibly can to attract tenants to the building, whether it's coffee shops or whether one considers even putting in a laundry or a childcare [facility]," said Rice.
But Redefine thinks the debate that it is perhaps time to follow the international trend and convert increasingly empty office buildings into residential units is being "overplayed" in South Africa, especially because in areas where vacancies are soaring, such as Sandton, there is already enough or an oversupply of residential units.
Rice said he thought what South Africa would instead experience will be a combination of businesses coming back to use their office space - even if it's less than what they used to occupy - and some conversions to residential units, but then in the low-income category.
Live Easy, a developer that provides affordable rental units, has been doing these conversions in the Johannesburg CBD for several years. Last year, the International Housing Solutions (IHS) said it had also started converting office blocks in Pretoria into residential flats and was considering converting another one in Sunninghill.
"I think there's always going to be an opportunity for conversions to residential. But I think at this point in time it's being overplayed," said Rice.
"I think if that ... there will be conversions at lower-income [level], but I think that's particularly a costly exercise," he added.