Struggling commercial landlords slash rentals, offer hard cash, incentives to attract tenants

This article was originally posted on BizNews.

Listed and private commercial landlords in upmarket nodes in Johannesburg are slashing rentals, offering cash and incentives to attract tenants.

They are reportedly offering unprecedented benefits in the form of installation allowances, beneficial occupation periods and cash payments, says Cresa.

Ailing office market

According to the Johannesburg Office Market Report Q3 2020, tenants remain cautious as a result of uncertainty in economic outlook.

The Covid-19 pandemic added to the ailing office market battling with high vacancy rates and declining rentals.

According to the report, vacancies stood at 13.6% in Johannesburg. The prime nodes of Sandton CBD, Illovo and Melrose recorded high vacancies of 17.0%, 22.4% and 13.9% respectively.

Cresa reports that of the four metropolitans, Johannesburg saw the largest decline in A-grade rentals recording a 3% reduction.

Many tenants insist on lower than 8% – 10% rental escalations when negotiating leases, says Ché Gaier, director at Cresa.

“In the current challenging business and economic market, tenants are no longer accepting these historic rates. We are seeing deals being concluded at escalations rates of between 6% -7%,” says Gaier.

Attractive incentives to lure back tenants into office buildings

Commercial landlords have a mammoth task of filling up space, and tenants stand to benefit from this unfortunate situation.

Gaier says currently some listed property Real Estate Investment Trust (Reit) landlords are offering several promotions aimed at attracting tenants.

“These promotions offer higher-than-ever cash payments, predominantly for tenant installation (TI) allowances, and cash payments (for any use) also being offered.”

Smaller and private landlords are not marketing these incentives as aggressively, however, many are still keen on offering generous allowances.

Incentives and benefits are offered across a variety of office grades and nodes. Gaier says commercial landlords offer generous incentives particularly for less desirable buildings and locations.

“This is a symptom of a market struggling with a surplus of B-grade buildings. Partly due to tenants upgrading to newer buildings in times where landlords have offered more attractive rentals.”

Discounted rentals

In Sandton, Bryanston and Woodmead some commercial landlords are slashing rentals by as much as 30% to attract tenants.

Paula Hardy, senior broker services consultant at Colliers International Johannesburg says listed funds do not advertise 30% discounts. “Listed funds have to protect shareholder assets. However, they are offering up to 12 months’ rent free periods.”

She notes that ALW Properties recently advertised their 5 Star Green Rated Athol Towers building in Sandton for R120/m2. In Sandton, P-grade rentals are R224/m2 according to the Johannesburg Office Market Report Q3 2020

“This trend is just beginning as we adopt to the new way of working and the casualties of Covid-19.”

Landlords also consider 12-months lease agreements if there isn’t much capex involved in the form of TI.

“This also applies if the tenant is in good standing with their rental. Lease agreements which are longer than three years are becoming difficult to secure,” says Hardy.

In select prime nodes, incentives given on longer leases

According to John Jack, CEO of Galetti Corporate Real Estate, in predominantly central nodes commercial landlords offer incentives to tenants.

JSE-listed Reit, Redefine Properties introduced Space 2 Spec offer on prime offices to attract tenants. As part of the incentive, tenants get back 50% off the first two years on five year lease agreements.

“This offer valid on select buildings encourages tenants to sign longer leases in exchange for free rental and/or capex contributions.”

He adds that during this difficult time, rental incentives are the answer to securing long-term leases.