From December 2019 to January 2020, many real estate commentators shared their predictions for what trends would shape the commercial real estate landscape in this, the first year of the new decade.
It’s safe to say that no one could have predicted the unexpected developments in the commercial real estate sector this year, given the seismic shifts in the worldwide economy. However, as 2020 draws to a close, it presents the valuable opportunity to look back at those original predictions and compare them what trends actually dominated commercial real estate this year.
Rewind some years ago, companies were signing long-term leases and frantically searching for office space in sought-after hubs like Sandton, Rosebank, and Cape Town’s CBD.
Owning or leasing commercial property in prominent areas was crucial to a brand’s image. Offices equipped with all the bells and whistles looked to creating a lasting impression on both clients and employees as hubs for creativity and productivity.
On the international front, office rental prices in 2019 were drastically increased in Manhattan, New York to cope with the mounting demand. Currently, office leasing activity is down by 70% according to GlobeSt.com.
While office space remains in place for most companies, its purpose has shifted. It has become flexible and it is more focused on collaboration rather than the standard ‘9 to 5’ grind so it comes as no surprise that landlords are working hard to attract tenants in new and unconventional ways.
John Jack, CEO of Galetti Corporate Real Estate says in the past, tenants would sign leases of five to ten years on average. “Today, flexibility is key where landlords need to get used to the idea of office space as a service.”
“Covid-19 taught us to prepare for every eventuality and flexible leases provide this peace-of-mind for both landlords and tenants. What Covid-19 has done is break the psychology of having to be at the office by 8am.”
Jack says that on average, rental collections for Galetti’s clients were hovering around 80% in the harder lockdown levels and are already starting to recover to 90% and above. Office and retail space are struggling more than industrial space which remains in high demand.
“Deferred rentals are now starting to be due for payment and at the same time judging by the traffic in the streets revenue has arrived back to support business. It’s those tenants that are still struggling with cashflow and having deferred rentals fall due that are going to potentially face failure if the landlords aren’t able to carry them for a little longer.”
Trends among the big landlords
Free rent and massive incentives in terms of CAPEX contributions which are at 20+ year highs. Again, the landlords are in competition with their own tenants as tenants start to sub lease space on attractive terms.
“Tenant incentives are on the rise and we are seeing an influx of innovative ways to ‘move’ office space over this challenging period,” notes Jack.
“In recent months Redefine has bolstered their balance sheet with the sale of non-core assets to help absorb as much as a 50% rental income decline. They have cut back on non-essential expenditure and have supported their tenants through rental relief”.
Redefine recently launched a service called Space2Spec. “This allows a new tenant to customise their rental on selected properties on offer,” he continues.
GrowthPoint, on the other hand, has developed SmartMove. An incentive program in which tenants receive 125% of their first year’s rental back in allowances when moving into one of GrowthPoint’s SmartMove buildings. This is based on a five-year lease.
“Tenants signing a three-year lease will receive 75% back in allowances” concludes Jack.