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The balancing act in Tyger Valley

15 / 06 / 2011

NOW that we are technically out of the recent recession, the question is being asked when things will return to ‘normal’. If our idea of ‘normal’ economic conditions has been formed in the period between 2003 until 2008, then the answer is a simple one. Not soon.

The need (or not) for commercial property is a handy barometer to evaluate economic sentiment amongst decision makers of large national corporations and SME’s alike. The decision to lease or purchase commercial property forces a company to take a three to ten year view of their operation.

One of the prominent decentralized nodes in Cape Town, namely the Tyger Valley area, has seen an increase in the vacancy rate of office premises from 2.50% in January 2008 to approximately 10% in March 2009. This increase was due to the economic climate combined with an over supply of office premises at that stage. Since then, the vacancy rate has moved sideways in the 10 to 12% range with no significant increase during this period, says Pieter-Jozua Erasmus of Capitol Commercial Properties.

There are furthermore no immediate plans for construction of new speculative offices developments in the area. A developer of an A-Grade office building has recently completed his feasibility study and requires R16 500/sq m to sell the premises, or R150/sq m as a gross rental to make the project viable (excluding VAT and parking). A higher demand for premises will lead to a decline in the vacancy rate, which in turn will lead to an increase in rental rates.

Only time will tell if the market will react quickly enough to the increase in demand for offices. The market will need time to become comfortable with the higher rental rates before developers will have the confidence to embark on new developments. The lag in the process to develop new stock could be anything between 14 and 20 months depending on the scale of the project. “We doubt if the market will react timeously to an increase in office demand,” Erasmus says.

“The Tyger Valley precinct has an office component of approximately 400 000 sq m. The area has historically had an office take up of 15 000 to 20 000 sq m of space per annum. With no new speculative developments in the pipeline, we could therefore experience a shortage of office stock within the next two to three years. Another item that could put pressure on the supply of new developments is the appetite of developers and financial institutions to provide speculative space. We are of the opinion that the only new, speculative offices to come onto the market might be in the form of excess premises as part of a development for a specific large user.” An example of a successful speculative development is the four buildings in Phase 6 of the prestigious Tygerberg Park situated against the Tygerberg Hill. A new tenant in the park is one of South Africa’s leading consulting engineering firms, SSI Engineers and Environmental Consultants.

SSI does have premises to sub-let and a flexible lease period could be negotiated. SSI have gone to great lengths to ensure that many greening principles have been incorporated into the installation to reduce the energy costs to the building.

Article courtesy of www.cbn.co.za