OFFICE MARKET REPORT. Sandton CBD, Gauteng. June 2018

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1 OFFICE MARKET REPORT Sandton CBD, Gauteng

2 BROLL INSIGHT Accessibility Sandton CBD is easily accessible via Grayston Drive off the M1 and via main arterials such as William Nicol Drive and Rivonia Road. Even though the node is prone to traffic congestion during peak times, some of this congestion may be alleviated in the future as a result of the continued improvement in infrastructure and the synchronisation of robots along with the well-established public transport system which is offered within the Sandton area, inclusive of the Gautrain Station and bus feeder routes. Aesthetic Appeal P-grade and A-grade stock is modern and well-maintained with highend finishes. Affordability P-grade: R220 R250/m²/month gross achieved A-grade: R150 R200/m²/month gross achieved B-grade: R100 R150/m²/month gross achieved Amenities The node offers a wide variety of amenities that include, but are not limited to, hospitality, conference facilities, convenience services and retail amenities such as the super-regional Sandton City. Area s Security The Sandton Central Management District monitors aspects related to safety, security and hygiene, with private security and boomed controlled access to most office buildings in the area. of Space As at Q1:2018 the Sandton CBD recorded an overall vacancy rate of roughly 15.9%. A-grade stock recorded the highest vacancy rate for the node at 19.7%, with P-grade vacancies being 6.3%. B-grade, which makes up the least amount of total stock at 17.4%, recorded a vacancy rate of 34.2%. HIGHLIGHTS Trends Energy efficiency and modern design continue to be a trend in the Sandton office market with tenants showing increased interest in spaces with Green Star ratings. The end of 2016 saw the introduction of rent-free periods, particularly with regards to B-grade stock. However, towards the end of 2017 landlords of A-grade buildings began following suit in order to secure strong tenants ahead of developments nearing completion toward the end of 2017 and during the course of Rental pressure is expected to continue for older buildings due to the decreased demand as well as the increase in new developments coming onto the market. The ever-growing trend towards the live-work-play concept can be seen in the Sandton node with the launching of Sandton Summit, a mixed-use precinct combining residential, hospitality, offices and retail uses, parts of which have already been completed while others are in the construction and/or planning phases. Take-up Take-up is slowly improving as consumer sentiment and confidence improves. There has been a definite increase in activity; in particular, buildings that are more efficient and have substantial amenities located within the building itself or in close proximity tend to be taken-up faster. Landlord BEE accreditation has also proven to be an important part of a tenant s decision with regards to building choice; it is becoming a material consideration when deciding on premises relocation. Demand for space within the Sandton CBD has been positive; however, in terms of unit sizes in demand, there has been a noticeable increase in tenants requiring smaller spaces, or looking at downsizing in an attempt to reduce overheads. Due to the abundance of available stock, deals are taking longer to conclude as tenants are more cautious, comparing buildings on offer. Often tenants opt to remain in their current premises as a result of relocation costs; however, incentives offered by landlords of newer buildings can lead to relocations taking place. Landlords are finding it hard to compete in an oversaturated market. Tenants Sandton is home to South Africa s top investment banks, financial consultants and legal firms. Tenants within the node include the likes of the Johannesburg Stock Exchange, EY, Webber Wentzel, Norton Rose, Discovery, Werksmans, Old Mutual and Bowmans among others. 1

3 MARKET OVERVIEW 115 West Sandton is a mixed-use node, offering premier office space, retail amenities as well as affluent medium-rise townhouses and high-rise residential apartments. Ease of access via main arterials and a well-established public transport system, inclusive of the Gautrain along with bus feeder routes, are evident within the node. The Gautrain has a station adjacent to Sandton City, connecting the node to O.R. Tambo International Airport as well as to the greater Johannesburg and Pretoria areas. The success of the Gautrain has had a significant effect on the Sandton CBD, with the majority of demand being for offices located within walking distance of the station and Sandton City. Furthermore, the likes of the Gautrain and other forms of public transport, along with the synchronisation of robots, are likely to alleviate the traffic congestion within the Sandton area which is evident during peak times. P-grade buildings make up approximately 47.2% of the office node with several older buildings having been redeveloped in order to create more A-grade spaces. 35.5% of the buildings are currently classified as A-grade, while B-grade buildings make up only 17.4% of total stock with minimal demand evident for such space. Even though demand for space continues to be positive, the size of units in demand has declined. The majority of demand is for P-grade offices with Green Star ratings (energy efficiencies), although demand from smaller users for sectional title offices has recently become evident. Furthermore, a move towards flexible work space which includes hot desking and open-plan work space has been noted. This trend is particularly evident with international tenants and is now also being adopted by local businesses. The bulk of the existing stock coming onto the market in the form of A-grade and B-grade buildings started becoming available from the end of This stock has become available primarily as a result of tenant relocations to newer buildings within the Sandton node which offer incentives. This has resulted in landlords of older buildings struggling to maintain existing tenants in certain instances. Pressure on rentals, as seen in recent months, is expected to continue particularly in A-grade buildings due to the large amount of new stock coming onto the market. Towards the end of 2017 certain landlords of A-grade buildings began introducing incentives such as rent-free periods. Landlords will now need to be creative in attracting tenants or find alternative uses for existing stock. P-grade offices in Sandton are marketed up to R250/m²/month, achieving anything from R220/m²/month upward. The bulk of space, A-grade, achieves rentals between R150/m²/month to R200/m²/ month, depending on building features. Parking bays within the node achieve rentals of between R900/bay/month to R1,250/bay/month. However, there has been a noticeable decline in the demand for parking in recent years with the ratio of bays/m² having declined. This has been attributed to the public transport available within the node. Grade Overview Prime Grade A-Grade B-Grade Space in demand (m²) 1,000-2, Lease escalation 8% 8% 8% Lease operating cost escalation 8% - 9% 8% - 9% 8% - 9% Gross asking rentals (R/m²/month) Gross achieved rentals (R/m²/month) Length of lease (years)

4 CONSTRUCTION ACTIVITY A number of office developments are currently under construction, while a refurbishment of roughly 20,000m² on 16 Fredman Drive is taking place, with space being converted into sectional title units and sold to investors and owner occupiers while also being available to let. Completion is expected towards the end of There are several P-grade buildings under construction including, but not limited to: 122 Pybus Road - a new development that comprises 14,000m² of office space, located within walking distance of Sandton City and the Gautrain Station. Completion is expected at the end of The Leonardo - a mixed-use building with 55 floors comprising residential apartments and penthouses, a conference centre, restaurants, offices (>15,000m²), and more. Once completed, it will be the tallest building in Sandton, exceeding 180 metres. Katherine Towers - a 21,000m² development situated along Katherine Street will be Bidvest Bank s new head office with additional space available to let. The MARC - a mixed-use development which comprises two buildings made up of 62,000m² office space and 15,000m² retail space. This development is situated on the corner of Maude Street and Rivonia Road, and is scheduled to be completed in stages with total completion expected in early CONCLUDING REMARKS The Sandton node and surrounds continue to be South Africa s premier office location and are expected to grow cautiously and steadily. The increase in supply seen over the last few years is anticipated to slow down as a result of the oversupply of stock currently being experienced which has placed increased pressure on rentals. This being said, developers have started thinking differently in order to find alternative uses for the remaining vacant A-grade buildings, and new mixed-use developments such as Sandton Summit seem to be the trend going forward. SANDTON CBD, GAUTENG LISTINGS Click the building name or image to view the listing online. 140 WEST DISCOVERY PLACE 115 WEST R 248 R 228 R 245 4,500 6,500 3,000 Click here for further listings in Sandton. 3

5 Head of Commercial Broking - Gauteng Rodney Luntz rluntz@broll.com Area Specialist Matthew Crawford mcrawford@broll.com Divisional Director - Research Elaine Wilson ewilson@broll.com Disclaimer Broll Property Group has taken every care in the preparation of this report. The sources of information used are believed to be accurate and reliable, but no guarantee of accuracy or completeness can be given. Neither Broll Property Group, nor any CBRE company, nor any director, representative or employee of Broll Property Group, accepts liability for any direct or consequential loss arising from the use of this document or its content. The information and opinions contained in this report are subject to change without notice. No part or parts of this report may be stored in a retrieval system or reproduced or transmitted in any form or by any means, electronic, mechanical, reprographic, recording or otherwise, now known or to be devised, without prior consent from Broll Property Group. All stock and vacancy figures have been derived from SAPOA.