With office vacancies expected to continue increasing as the economic effect of the pandemic and lockdown becomes more pronounced, property owners are preparing themselves for some difficult months ahead.
While the sector can weather a six- to 12-month period of people working from home, over the longer term property owners want workers to return to offices.
This is because of the knock-on effect an extended absence of office life could have on the economy.
“The problem is if your people aren’t going into the offices, they are not going to go buy sandwiches for lunch, they are not going to shops to buy shirts. Then all those people giving those services don’t have jobs and the knock-on effect is unbelievable,” says Geoff Jennett, CEO of Emira Property Fund, which owns a R3.5bn office portfolio in SA.
“It’s in all of our interest to get back to work [in the office] and make this work. If we don’t, some smaller businesses are not going to make it,” says Jennett.
According to the latest office vacancy research by the South African Property Owners Association (Sapoa), for the third quarter of 2020, the overall office vacancy rate in SA was at a 16-year high of 12.7%, with “the all-time” high of 15% “not looking too far out of reach in the medium term”.
Property economist Erwin Rode, CEO of Rode & Associates, believes that over the longer term the vacancy factor in the office sector is going to worsen as a result of the pandemic creating structural changes in the office environment, and because of a deteriorating economy.
“I expect once the dust settles — and this is purely a guestimate — we will land up with a shrinking of demand of about 10% to 20% for office space,” says Rode.
“Many more people will be able — and will be allowed by their employers — to work from home, where otherwise they would ordinarily not have been.
“I think employers will see the light and become more liberal in this respect and trust employees to simply deliver and not ask: ‘When are you working?’ "
Rode says 80% of his own 17-member staff are working from home and will do so for the foreseeable future.
His company is considering various options such as reducing space or subletting what it isn’t using.
It’s in all of our interest to get back to the office and make this work. If we don’t, smaller businesses are not going to make it.
— Geoff Jennett, CEO, Emira Property Fund
However, he says office culture will survive because companies will want to have a presence in a building, even if it is a smaller footprint.
But communications and marketing firm Flow Communications, which has about 60 staff based in Johannesburg and Cape Town, has taken the bold step to permanently exit its offices in Johannesburg's Rosebank and Cape Town’s Kloof Nek.
CEO Tara Turkington says the agency had to pay penalties to exit its leases but though it was “expensive” in the short term, over the medium to long term it had been “great”.
“We left our offices a week earlier before the actual lockdown because we knew it was going to come and it worked so wonderfully. It was just so seamless. We are all fairly digitally astute and we were quite geared for it, in retrospect. It worked so well that after about two or three months we decided, why try and fight this wave? We don’t know how long we are going to be off. We don’t want to endanger our employees. Let’s start thinking about the freedom of doing business internationally in a remote way.”
Turkington says at the same time the group had recently won a couple of large international contracts, which made the decision that much easier.
Emira’s Jennett says the group has had requests from both big and small tenants to “reduce space”.
“The tenants’ businesses are evolving and they are working out what working from home looks like, what online looks like and what the South African economy looks like.
“You get the requests but you have contractual agreements with tenants, so if I’ve let 100m² to you for the next three years at a certain rate, that is my contractual agreement I have with you.
“You can come and ask me for a reduction in space and I will certainly look to try and help you as we are in a longer-term game to make sure you’re sustainable as a tenant. But there is certainly no obligation up until that lease expires.”
Jennett says vacancies in the group’s office portfolio have “ticked up a little bit”. This factor was sitting at 6.9% in June and is “probably a percent or two higher than that at the moment”. He expects vacancies to continue gradually increasing over the next year.
The office vacancy rate in SA in the third quarter of 2020, which is at a 16-year high, according to the South Property Owners Association.
— 12.7 %
Jennett says big companies are also holding back on returning staff to their offices as they are worried about any “potential liability” if they open up and experience an increase in Covid-19 infections.
“It doesn’t seem like they are in a rush to get back. Look at the big banks, they seem to be going back in dribs and drabs.”
Nedbank is cautious about returning staff to its Sandton premises, which it owns, saying its 135 Rivonia Road campus is sitting at a capacity of about 8%.
Chief risk officer Trevor Adams says the bank is planning to “return to reasonable capacity” there from February or March 2021, but this will depend on the Covid-19 situation at that time.
“Reasonable capacity is anticipated to eventually approximate around 60% of the approximately 8,000 employees the premises is capable of accommodating,” he says.
James Formby, CEO of Rand Merchant Bank, which owns its office campus in Fredman Drive, opposite Nedbank, says during the lockdown the group had a base load of essential workers who had to be physically present at the office, which was “give or take around 10%” of staff usually at the premises. “Our thinking is to move to a blended model where people spend some time working from home and some time in the office,” says Formby.
During November, the bank had been encouraging “staff to come in once a week” but this had been “voluntary and for now about 20% of our people are coming into the office”.
“With the additional requirements of social distancing and other [Covid] protocols, we wouldn’t want more than 50% of the people in the office. We believe that around 50% is good in terms of social distancing. We expect that we will move back into that range in the first half of 2021,” says Formby.
Paul Kollenberg, Growthpoint Properties head of asset management for the office sector, says some divisions of big companies “are going back to their offices”.
“Some of our tenants are saying it is much harder to keep staff motivated at home. We are seeing people coming back,” says Kollenberg.
Growthpoint, which has an office portfolio valued at about R29.5bn, says professional firms are also returning to offices because their staff need to “collaborate with each other”.
Kollenberg says tenants are cautious about committing to long-term leases until they know if their space requirements will change.
Growthpoint is also seeing a “little bit of an uptick in vacancies”. The group ended last year with an office vacancy rate of about 15% and that had probably increased by about 1% or 2% since then, says Kollenberg.
“People are downsizing or simply not being able to pay for the space because they are distressed because of the economy. One or two tenants have also gone into liquidation and that has had an impact on us too.
“We are renewing a lot of tenants, even some of the tenants who we had thought may move. They don’t want to commit somewhere else so they would rather stay with us and just wait and see what happens.”
Jennett expects the trend of shorter leases for offices, which began before the pandemic, to intensify as a result of Covid-19-related economic fallout.
Leases used to be anywhere from five years and more, but now people are opting for two- to three-year agreements because of the uncertainty.
