Commercial property: adapt or die - Everything Property

Commercial property: adapt or die


On-demand office space, e-commerce, inner-city gentrification and worker mobility trends have resulted in property investors exploring new models to turn a profit in a soft market. That is how Darryl Mayers and Andrew Wooler, joint CEOs of the Investec Property Fund, summarises what was shaping the commercial property market in early 2020. They point out that the commercial sector has benefited from delivering robust returns to institutional investors over 15 years, outperforming nearly every other local asset class. Within it, the retail sector was particularly buoyant. But now this dynamic has shifted. As Absa’s head of commercial property and equity investments Klaus-Dieter Kaempfer notes, the Covid-19 outbreak has had a systemic impact on the global economy, adversely affecting many asset classes across many geographies.

It has been a tenant market for the past few years, meaning landlords have had to be “a lot more flexible”, according to Colin Anderson, COO of Rabie Property Group, a developer whose commercial and retail interests are focused in Cape Town’s Century City precinct. “The additional strain the lockdown is having on businesses will result in a call for increased innovation when structuring deals. The commercial property sector is a very important cog of a healthy economy and if we are able to reshape and be inventive now, we will be in a good position when we experience a resurgence,” Anderson says. Growthpoint Properties SA CEO Estienne de Klerk agrees that, owing to a sustained depressed macroeconomic environment, local commercial property was under pressure before the health crisis hit. “The full impact of the lockdown for commercial property and its users will only become evident long after lockdown ends,” he says. As SA’s largest JSE-listed Reit, Growthpoint is invested in real estate across three continents.

Office sector

“We dabble in all commercial sectors,” says Grant Silverman, marketing and leasing director at Abland, one of SA’s larger property developers. “The big question, of course, is where are offices going? “There’s been a trend even before Covid-19 where companies were looking at the cost of occupation. All the virus has done is to push it forward,” says Silverman. “In the past few years, people were consolidating their offices in central hubs rather than taking lots of satellite offices. “We have found they want mixed use over a standalone office: the office with retail, gym, hotel and a grocery store.” For example, Abland’s Sandton Gate opened in early 2020 with P-grade office space. About 60% of it is let.But surely development pace has slowed? “We certainly have a number of buildings that haven’t filled as quickly as anticipated, so we’re not at the pace of two years ago,” says Silverman. Abland’s new P-grade urban building on Cape Town’s foreshore, 35 Lower Long, is in its final stages and attracting interest from smaller tenants. Silverman says Abland is negotiating with one or two larger tenants, despite the depressed market. With current high vacancy rates, the office sector is the most vulnerable, says François Viruly, associate professor of property economics at the University of Cape Town. Also under considerable pressure is the retail sector, forced to adjust to changing retailing patterns. “I predict that the short-term focus of investors will be on reducing vacancy rates and retaining tenants. There will be an equal concern to control the rise in operating costs, especially rates and taxes,” Viruly says.  Rabie is using the pandemic as an opportunity to reconfigure its office offerings. “A small contingent will definitely transform entirely to a work-from-home operation, but we believe these would be smaller businesses in certain industries such as technology,” says Anderson. “We don’t believe the work-from-home model will suit all business, but some may use a hybrid format, allowing staff to work more flexible hours.

“Overall, businesses will be relooking how their space is configured for the short to medium term. This could mean using the same space – instead of reducing it – as they need to accommodate fewer people per square metre. We may find that companies which cannot operate effectively working from home will require more floor space to accommodate all their staff.”Anderson says its new Sable Corner building in Century City will be completed soon. It presents an opportunity to consider a flexible design: one apt for current physical distancing requirements that can also be adjusted for future needs.“Growthpoint is working on a solution to offer tenants offices for flexible lease terms in specific buildings to enable them to get through the current uncertainty,” says Paul Kollenberg, Growthpoint’s head of asset management for offices. In his view the lockdown has already impacted more severely on, for instance, the travel industry. On the upside, some tenants in the ICT sector and grocery delivery industries are expanding and require more space. Kollenberg says generally tenants have adjusted well and adopted technology for remote working, which might lead to decreased space needs in future. “The desire for less dense workspaces could either increase businesses’ space needs or have a net-zero effect, as some staff work remotely while others work at a greater social distance at the office.”

Retail outlook

“The lockdown has hit this sector the hardest and in the most apparent ways. Included in the recipients of rental relief that Growthpoint has given are 1,494 small and micro retailers,” says Neil Schloss, Growthpoint’s head of asset management for retail. The company has invested in safety and sanitation, especially at its shopping centres nationwide. Most retail landlords are remodelling their cash-flow forecasts to accommodate expected weaker rental collections. “Landlords will also consider providing relief for office, industrial and hospitality tenants, where the lockdown severely impacted the tenant and where it is justified,” says Kaempfer. According to Silverman, commercial tenants are still signing leases; many are just watching their bottom line. Abland has seen an uptick in small retail centres and is building “a fantastic pipeline of these sorts of retail centres going forward”. Its retail centres Waterfall Ridge (in Midrand) and Jackal Creek (in West Rand) have had construction delays but are tenanted and on track for completion in Q1 2021. “They’re both smaller convenience retail shopping centres, because the trend is moving away from big malls towards convenience closer to home,” says Silverman.  Schloss notes that retail loss sectors are showing.

“Recovery is going to be particularly difficult for restaurant, entertainment and travel tenants, for example. In addition, the retail sector is going to have to face challenges such as Edcon going into voluntary business rescue,” he says. Devmark Property Management manages sectional title housing schemes, affordable housing, retail centres, commercial properties, light industrial properties and homes. MD Heinrich Ehlers points out that numerous businesses were without income for April and May. Most sought relief from landlords during this time. “Many realised that they cannot afford their rentable space,” he says. “In some cases, their needs have changed and they can easily operate in a smaller space.” Devmark offered some tenants relief packages if they signed and extended their lease agreements. “With the current market situation, it’s more attractive for us to retain a tenant at a reduced rental than to try to source a new tenant,” says Ehlers. “This way the tenant gets relief during the tough current economic climate and we get to keep our tenant for another couple of years.”

Industrial activity

There is one sector showing positive market movement. “The industrial sector is an interesting one,” says Silverman. “The manufacturing side has definitely slowed but distribution, storage and data centres are picking up in SA. Everyone is jumping on the bandwagon with online shopping. It’s nothing new; the push has just been accelerated. “We launched a new industrial building called Atlantic Hills on the N7 near Durbanville. The development is multitenanted. Units in this precinct range from large warehouses to mini units. All of a sudden, distribution and warehousing enquiries have multiplied.” Growthpoint industrial head of asset management Errol Taylor is more cautious. He says while most industrial businesses came to a halt during the lockdown, some of this sector’s users continue to operate and a handful are even thriving. Manufacturers and transporters of essential goods and distribution centres of online and brick-and-mortar retailers selling essential products are among those that continue. “Realistically, however, we can expect that small and large businesses will face enormous challenges in the coming months,” says Taylor, referencing the country’s heavy unemployment burden and limited cash reserves. One commercial property exception is Tradehold, which operates mainly in SA and the UK.

“The big question, of course, is where are offices going? ” Grant Silverman, marketing and leasing director, Abland

Locally, 83% of Tradehold’s total gross lettable area of 1.5-million square metres held through its subsidiary Collins Group comprises large-format industrial and distribution centres leased to local corporates on long-term contracts. Tradehold joint CEO Friedrich Esterhuyse says the company is seeing the benefits of “fortuitous timed restructuring of the business” that started some two years ago, aimed at increasing its flexibility and resilience to adapt easily to changes in the environment. In the UK, the company owns a property portfolio of four shopping malls and various commercial buildings in Greater London through wholly-owned subsidiary Moorgarth. Some are let to Boutique, a 90% subsidiary of Tradehold offering flexible office space on short-term leases. “Unlike co-working, where different entities share desk space in an open environment, Boutique provides clients with a traditional private office environment.

This allows them to manage for themselves the hygiene regimes imposed by the pandemic conditions,” Esterhuyse says. “With an occupancy level of 92% of its 4,500 individual workstations, we believe this business is excellently positioned to benefit from the new work-from-home culture that we anticipate will remain in place after the pandemic, coupled with a need of businesses for a physical presence in major cities, accommodating fewer employees more flexibly.” The absence of long-term planning around a pandemic makes it challenging for commercial developers and landlords. Tenants require flexible leasing structures, green elements (for lower operating costs) and adaptable office formats that accommodate remote workforce portions or more space-aware footprints. The future of commercial property will be about the provision of a service rather than the selling or letting of space, predicts Viruly. “It means that property companies will start resembling hotel companies. When you rent a hotel room, you don’t ask yourself how many square metres you’ve rented – you are primarily interested in the service that will be provided. Tenants in the commercial property sector will be placing a considerable emphasis on facility management.”

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