Double whammy for office property market

01-08-2005

After many years of underperforming, office rentals are set to soar sky high as both demand and supply side factors are exerting upward pressure, predicts the Rode team.

Rode's Report editor Garth Johnson explains that the high vacancies that have been seen over the past few years were largely due to overzealous development. In such situations, it is to be expected that demand for office space will take time to catch up before starting to have an impact on rentals. Consistent, although by no means spectacular, economic growth since 1999 has driven office vacancies in most big office nodes to normal levels. Moreover, according to a recent Rode macroeconomic survey, economists expect economic growth to average 4% to 5% over the next five years, while interest rates and inflation are expected to remain low and stable. These factors spell out one thing for office rentals in the coming months — serious demand side pressure.

The residential property boom has already placed a huge amount of pressure on building costs, and is expected to do so for some time still. Government’s increased urgency to deliver more houses will put additional strain on building costs. Increasing non-residential building activity, especially office construction, will exacerbate the pressure exerted by the residential building sector.

Recent surveys by the Bureau for Economic Research at the University of Stellenbosch furthermore reveal that contractors are anxious about the lack of skilled artisans in the industry. Rising oil and steel prices are two further factors that could place additional strain on building-cost inflation.

With such pressure on both the demand and supply side, where can office rentals go but through the ceiling, asks Johnson.