Commercial space is standing empty in South African cities
problem or opportunity?1st Jul 2020
A 2019 report by the South African Property Owners’ Association (SAPOA) states that nearly 20% of the office space in the Durban CBD and Rosebank (Gauteng) was empty in the last quarter of that year. And that was before office workers skedaddled home en masse and cyber-commuted while battening down the hatches against SARS-CoV-2. What does that mean for our cities, and for the people who live in them? Or, more importantly, the people who don’t live in them. And what does it mean for developers?
If you are over 60, and you grew up in Joburg, you may remember Hillbrow as a vibrant, cosmopolitan community with great restaurants, coffee shops, clubs and – wow – a 24-hour grocery store! Unheard of in the 1970s. And the centre of Joburg was the opulent, squeaky-clean, unassailable economic powerhouse of Africa.
In 1981, it made commercial sense to drop R65 million (about R14.9 billion in today’s terms) on building the iconic postmodern skyscraper known as ‘The Diamond’ at 11 Diagonal Street. And, yes, there was already a very nice mixed-use development somewhere to the north, but no-one thought it would develop into much more than a closer-to-home urban centre for the mink-and-manure set who lived in Sandton with their polo ponies, show jumpers and Jack Russels.
Owning a skyscraper in the city centre pretty much meant you could ‘retire’ and travel the world on the rentals. Especially if it was close to the iconic Carlton Hotel, which regularly played host to international celebrities, and – not coincidentally – was home to what was regarded as South Africa’s finest restaurant – The Three Ships.
Fast-forward to the beginning of the 21st century, and things were very different. That city-centre skyscraper you splurged your trust fund on in the 1980s wasn’t funding your playboy lifestyle any more. In fact, the rates bill was probably more than you were getting in rent, so it wasn’t even worth keeping. But you couldn’t sell it, either. So it just – well – got hijacked, fell into disrepair, or became ‘occupied’. Or all three, most likely.
Do we learn from the past?
By the late 1990s anyone with any sense was heading out of the city to Sandton and Rosebank, where skyscrapers were sprouting like mushrooms after rain. And money was made, and is still being made. But, really, how long can you continue building more of the same type of development in the same area before you hit saturation point? If there are 20 developers all doing the same thing because there is a market, have they all taken into account that the market will need to spread over the other 19 developments being constructed at the same time? You’d think the answer would be ‘yes’. But, as Rosebank, for example, has been sitting with a 17% vacancy for a while – and there are equally scary vacancy figures in Cape Town, Durban and Pretoria, too – it would seem not.
We’ve found a solution for Joburg’s hijacked buildings
Well, yes, but not really. We have lots of empty buildings that are not earning any money and are either costing a fortune to guard and maintain, or are falling apart. And we have lots of people who need homes, and lots of children in overcrowded, under-resourced schools, and no money to build new ones. Are these two separate problems, or is the one the solution to the other? It’s a no-brainer, really. But it’s not that easy, as former Johannesburg Mayor Herman Mashaba discovered when he tried to implement a programme of reclaiming hijacked buildings, and putting them out to tender for development. It’s a great idea, and the programme is continuing, but it is also continuing to drag on – tangled in kilometres of administrative red tape, and spirals of corporate vacillation. Yes, it’s obvious, but it’s not easy.
What will happen to that empty office space?
There are some people who really do need to be present in order to do their jobs – mechanics, dentists, bricklayers, factory workers, hairdressers, cleaners. But, as we discovered pretty darn quickly when we went into COVID-19 lockdown, many people can work surprisingly efficiently as long as they have good connectivity, a laptop, a phone, a table and a chair. Even that archetypal example of office-bound wage slavery – the call centre – has been freed from dependence on office space by technology. In 2018, an article in Business Insider speculated that Amazon was looking for new office space in Cape Town to house 10,000 workers. A year later, July 2019, BusinessTech reported that the tech giant was on a ‘hiring spree’ to support its ‘massive expansion’. And now – July 2020 – Amazon is actively advertising for virtual ‘Cape Town-based’ customer service agents to work from home.
Here’s the scary thing for owners and/or developers of office and commercial space – having been forced to work from home, many people have quickly realised its many advantages. How often have you heard anyone saying how much they miss the two-hour commute, and only seeing their children after dark? I thought so. Relaxing lockdown will be a long, slow process, and many, many employees will negotiate remote working into the future. So how will that impact on the 20% vacancy figures for office space? And how will that impact on your bottom line if you own, or are building, office space?
But what should really get you quiddling in your boots is that this increase in vacancy started pre-COVID-19. The SAPOA report showed that ‘Rosebank in particular has seen its vacancy rates spike as speculative developments come to market […] During the final quarter of 2019, Rosebank saw a 10% increase in its vacancy rate, which reached 17.9%.’
Retail is also running scared
A News24 article in June 2020 describes how e-commerce has increased by 135% in April compared to January globally, with South African figures being similar. Gareth Paterson, Director Retail Vertical at Nielsen South Africa, says that, while this increase in online shopping was clearly in response to COVID-19, it’s likely it will translate into permanent long-term habits. Which is not great news for small (or large) retailers struggling to pay rents. Or their landlords. In the UK, for example, Britain’s largest owner, developer and manager of shopping malls, Intu, has gone into business rescue. And think of all those Edgars and Jet stores that may well close down soon – that’s a lot of square metres. This could have serious repercussions for mixed-use developments.
It’s time to think out of the box
Landowners in central Johannesburg were taken by surprise by what was, in retrospect, an obvious shift. And now we’re facing the spectre of the same thing happening in Rosebank or in the centre of Durban, as corporates scuttle off to the North Coast. Or even in Cape Town, which – while seemingly more resilient than the other two major cities – also has whole floors and whole buildings standing empty in the city centre. It’s hard to imagine Rosebank’s skyscrapers becoming ghost buildings, hijacked and rented out to desperate immigrants. But 40 years ago, it was hard to imagine that in Hillbrow, or Yeoville.
Development does not happen in a vacuum. The expansion of the Sandton-Rosebank-Midrand agglomeration spelled the death knoll for Central Joburg, and the development of the North Coast may well be doing that for Central Durban. And, hey, is it possible that the revival of Central Joburg is negatively impacting on demand for space in the Northern Suburbs?
We don’t know the answers for sure (there’s a PhD thesis there, or at very least a Masters) but we do know that every development changes the social and economic landscape. Usually in the ways hoped for, but not always. And, while these events may seem like black swans, with a little bit of hindsight we realise they were boring old predictable white swans after all. We just failed to take note of the cyclical nature of land use and property values, and to predict.
It’s all about how big you think the world is
The sad thing about this is that, while the problems are obvious, and there are solutions that seem obvious, we need to change the way we make decisions if we are going to implement those solutions. We need to change the way we evaluate the success of a project.
If we look at the issues purely from a pragmatic, local perspective, it is a no-brainer. Use the empty buildings for schools and low-cost housing. Duh! But that doesn’t take into account political sensitivities, the build-up to the next election, or the need to present a favourable balance sheet at the next shareholders’ meeting. Or zoning, or funding, or any other black swan lurking in the (probably dry) water feature in the lobby.
But here’s an interesting thought that has nothing to do with buildings, but all about how you view your business. Most airlines, including the not-so-successful SAA, will not fly routes that don’t make a profit. Obviously. That would be commercial suicide. Wouldn’t it? Well, you’d think so, but the three airlines that deliberately keep unprofitable routes on the schedule – as an integral part of their strategy – are the Middle Eastern Big Three: Emirates, Etihad and Qatar. They regularly fly a number of routes that consistently lose money – but that feed the spectacularly profitable routes. That’s why they keep flying from Dullsville, Back-of-Beyond and Sleepy-Town to Dubai, Doha or Abu Dhabi.
So perhaps we need to look at not what it would cost to build more affordable housing, but what it would cost – in the broader sense – to not build it.