PRIME COMMERICIAL REAL ESTATE HAS POTENTIAL FOR PATIENT INVESTORS
Commercial real estate market indices have been in such a protracted slump that investors are failing to see the long-term growth potential created by the sector’s downturn.
While it is true that the national office vacancy rate was reported to be 18.2% in 2021, notes High Street Auctions Director Greg Dart, it is equally true that post-pandemic social and economic activity only began to normalise this year.
“We need to start viewing commercial real estate investment in terms of where demand is likely to be in three to five years’ time, rather than obsessing over quarterly statistics, and we have a fair number of data points and emergent trends on which to base predictions.
“In the post-pandemic negative column we have economic shrinkage, an office vacancy backlog to fill and an as-yet unknown percentage of the workforce that will continue to work remotely or in a hybrid model.
“On the investment plus side, two factors that will give commercial real estate substantial impetus towards equilibrium are the growing number of older commercial buildings earmarked for residential conversion, coupled with the massive decrease in new commercial builds.
“According to StatsSA’s Q2 2022 data, office space planning and completions remain the weakest of overall commercial building levels, declining by -50.1% year-on-year in Q2, following a -43.9% decline in Q1. For the twelve months to June 2022, square meterage of office space plans declined year-on-year by -50.14%.
“Plans passed for the twelve months to June 2022 remain -69.9% down on the twelve months to June 2019 and -74.2% down on the twelve months to June 2018.”
“It’s likely, given those numbers, that within five years as economic activity builds to pre-pandemic levels, we’ll see office vacancies drop by 10%, if not more.
“Demand will be at the upper end of the market, where corporates will be seeking very specific types of office space. And investors who can meet that demand are going to cash in handsomely.”
Dart says fund managers building long-term portfolios should be assessing current opportunities available in prime commercial stock before the market once again turns bullish.
“Business rescue properties in desirable commercial locations are ideal long-term investment vehicles, because they are structurally modern office blocks that are ripe for internal redevelopment to suit new corporate space demands.
“High Street is auctioning just such an asset in the heart of Hatfield in Pretoria on its September 8th sale; an office complex of more than 10 300m² build around three internal communal courtyard spaces.
“The large Pro Equity Court at 1250 Pretorius Street presents an excellent value proposition from a current income perspective because it is multi-tenanted, but also from a long-term investment perspective because of its scope for bespoke tenant-specific redevelopment.”
Dart says office spaces going forward will need to be in central hubs close to shopping and transport amenities, just like the Pro Equity Court. They’ll have to be light and modern, and offer indoor and outdoor work and recreation areas.
“But the biggest winners in the commercial space will be those investors who transform interiors to suit corporate needs going forward, which means doing away with cubicle floor layouts.
“Owners should be thinking of spaces tailored to hybrid workforces. Open plan offices will always be around, but the modern trend is for these to be spread out with a hot desk system in mind, more green architecture and break-away communal discussion spaces.
“The most important trend changes, however, come with the incorporation of several mini meeting rooms with superior AV technology to accommodate meetings with remote staff and clients, as well as sound-proof office pods.
“With widespread movement toward versatile, welcoming office spaces, there’s an emphasis on creating mini environments that can inspire focus – the same focus that people became accustomed to when they worked at home. In that context, the benefits of sound-proof work pods have become increasingly popular.
“These are enclosed spaces that are private, welcoming, quiet work environments. Single-person ‘hot desk’ style pods help to facilitate concentration in an open-plan office and commercial buildings offering these amenities will attract higher rental income than traditional office spaces.”
Dart says business rescue properties such as the Pro Equity Court on auction on September 8th present an opportunity for investors to capitalise on current market values and get in ahead of the upturn to come.
“No market remains flat forever and the time to buy is when it is low; not at its peak. Auctions set market value in the most transparent way, which is why so many funds transact through us. It makes financial sense.”
Dart says says High Street’s auction will begin at noon sharp on September 8th and pre-registration is essential.
The hybrid auction will be both live at the Grosvenor Room and Marquee at the Bryanston Country Club, 63 Bryanston Drive in Bryanston, Johannesburg, and virtually live-streamed across the world via High Street’s website, its social media channels and the High Street Auctions app.
Bids will be accepted from the floor, by telephone, on the High Street app and via any other digital streams prescribed by the auctioneer prior to the sale. For more information on the auction, visit www.highstreetauctions.com.