Office space being converted

Office space being converted.

Presistently high office vacancies, particularly in city central business districts (CBDs), continue to spur conversions to residential units.

The latest SA Property Owners’ Association (Sapoa) office vacancy report revealed that the national office vacancy rate declined by 0.4 percentage points to 11.1 percent in the second quarter of this year while the national inner-city vacancy rate declined by 0.1 percentage points to 12.8 percent.

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It said the C-grade office segment registered the biggest improvement in vacancy rates, with a quarter-on-quarter improvement of 1.1 percentage points.

However, Sapoa said the improvement in the C-grade segment was partially driven by residential conversions, which were a common trend at this part of the cycle.

It said this trend over the past two cycles followed a surge in new development, which accelerated the reclassification of ageing B-grade stock to C-grade. “The subsequent supply overhang and recovery periods then sees increased levels of residential conversion as a result of lower demand for office space and lower selling prices per square metre, making conversions more feasible.”

Real estate consulting firm Jones Lang LaSalle (JLL) reported last month that the office vacancy rate in the Johannesburg CBD improved year-on-year to 12.9 percent in the second quarter of this year from 19.7 percent in the same quarter in 2015.

JLL added there would be a downgrading of older stock as new limited supply came into the market, which would drive vacancy rates higher for older-grade buildings.

It said some landlords were allocating capital expenditure to bring these buildings in line with higher building specifications that made them more competitive with premium grade developments but there continued to be concerns about oversupply in the market.

However, this is likely to change in the future as more of the older stock is either refurbished or gradually converted to residential.

Joel Rosen, the managing director of Prime Residential, which has been involved in a number of office to residential conversions, said there were a large number of office vacancies, especially in some areas of Johannesburg. “With fewer new commercial tenants entering the market, there is often no other option but to look at alternative ways to make these investments work for you,” he said.

Rosen reported strong interest from commercial property owners because the traditional deal flow had slowed due to tough economic conditions. He said converting office space into residential rentals was gaining in popularity, particularly in CBD areas where there was a dearth of mid market residential property for young professionals looking to live closer to work.

Rosen added that residential property had also become a more attractive asset class because it was delivering better returns. However, Paragon Lending Solutions chief executive Gary Palmer warned that not all CBDs offered the same opportunity with Cape Town experiencing an oversupply of new higher end office to residential conversions.

Author – Roy Cokayne

Original Publisher – IOL

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