The past month will forever be documented in our country’s history. Beyond Covid-19, we’ve seen various other unprecedented local events taking place such as the country’s lowest repo rate to date, payment holidays by lenders, rental holidays by retailers and significant salary cuts across every industry.

John Jack, CEO of Galetti Corporate Real Estate says that the near future promises to be just as extraordinary. “One particularly noticeable shift is that of office rental agreements. Companies are now acclimatising to working remotely and many are experiencing the benefits of improved productivity and reduced overheads, first-hand”.

Jack notes that this trend will make more room for current trend-setters such as WeWork and Regus which offer flexible terms based around tenants’ requirements. “Pre-pandemic, we saw millennials and more recently, Generation Z influencing the notable shift from traditional 9 to 5 office set ups. Post lockdown, we expect that this trend will accelerate rapidly with increased connectivity, flexibility and scalability at the forefront of every business”.

Tenants have the Upper Hand

On the whole, the last decade or more has been a ‘landlords’ market’ with relatively limited space available and a trend of increasing rentals year on year. “Terms in lease agreements were largely driven from the landlord’s side except in the instance of very large multinational tenants”.

Over the past 12 months, we have seen that trend change somewhat and now, more recently, swing heavily in the favour of the tenant. “Landlords will need to get very creative with lease structures creating significant flexibility therein,” says Jack.

In this market, occupiers looking to sublet have become the landlord’s greatest opposition. “Where a sublessor is willing to take anything and still be better off than paying for space they aren’t using, it’s typically very hard for any property owner to match these terms”.

Jack cements this point saying that global retrenchments have seen some companies give up 50% of their space due to downsizing and optimisation of existing space, potentially with some staff working on a flexible basis. According to JLL, it’s estimated that 30% of South Africa’s corporate real estate will be flexible by 2030.

“Cashflow shortages and the cost of relocating will be too significant for many small to medium sized companies to take on. Here, landlords will follow in the footsteps of co-working spaces such as WeWork to fill their buildings and cover their overheads”.   

“The unprecedented repo rate cut to 4.25% per annum could help to reignite the property sector in the long-run but we don’t see it bringing any notable relief in the short-term. That said, the spread between yield and interest rate currently sits at an all-time high, last seen in the early 80s, which does provide opportunities for investors coming into the market” says Jack.

Jack cautions the industry to brace itself for a period of turbulence and change. “Any deal is better than no deal. Restructure your agreements and look to form strong, mutually beneficial partnerships with your tenants”.

Generation Z and the Growing Demand for Flexible Workspace

In a recent article, Galetti highlighted Generation Z as a savvy, thick skinned generation that will make up a large part of our country’s workforce by 2030.

“In these tough economic conditions, this savvy generation will need to be more self-sufficient and will undoubtedly bring massive change to the workplace. Generation Z gives rise to fresh energy in the workplace. According to Raconteur.net they’re self-starting, self-aware and more realistic than Millennials,” says Jack.

Jack says that it’s no coincidence that JLL’s predictions around changes to corporate real estate collides with the rise of Generation Z. “More than ever before, we expect to see a huge demand for co-working amongst this generation as they continue to influence the working world as we know it. We will see a strong movement towards flexible spaces where Generation Z’s needs are being catered for”.