A look at how the development has affected the commercial real estate sector in Johannesburg.
Just over a year ago, Waterfall was not an official business address. Fast-forward a few months and Waterfall Business Estate hosts over 15 major corporates in South Africa. While the economy has not taken off since the 2009 recession, Waterfall has beaten the odds, attracting occupiers from across the city. The result is a development success story in an economic time that is less than ideal.
Unlike Sandton and Century City, Waterfall came onto the market during a much more difficult time. Although the city is expected to expand in time, demand at this stage remains level, increasing the competition amongst landlords. In the short term, is the presence of the node shaking whatever stability had been created amongst the older and more established nodes of the city, especially within the context of a downturn in business activity and confidence?
So where are Waterfall’s corporate occupiers coming from? At the start of 2015, more than half of the 25 office nodes in Johannesburg had shown an increase in vacancies, indicative of a more subdued market than in previous years. This cannot solely be attributed to Waterfall, but it is worth noting that in the 12 months that Waterfall added just over 42,000m2 of office accommodation, total vacancies in Johannesburg increased by 87,850m2 to 1,139,788m2 in Q1 2015 (SAPOA). And with most of the Waterfall developments have being non-speculative in nature, this could imply that the node has contributed up to 48% of the new office vacancies in the city by attracting existing tenants from other nodes. Naturally, the advantages that Waterfall offers has made it a highly attractive option for occupiers, and as supply in the node improves, vacancy growth in other nodes may continue.
Assuming office demand doesn’t show a significant change from current levels, these advantages may continue to attract occupiers from surrounding nodes. The infographic below illustrates where some of the major occupiers in the node have moved from, contributing to the vacancies in those areas. Waterfall has been able to attract tenants from within a close radius to itself (such as Sunninghill and Midrand), but also within a broader radius, reaching as far as Boksburg.
One of the similarities between nodes that have lost tenants to Waterfall is their quality of stock. Many of these nodes tend to have a much lower quality office stock, if any sizable stock at all. For example, over 12,000m2 of occupied stock in Waterfall is made up of tenants that have relocated from Midrand, which has mostly Grade B office stock. The office vacancy rate in Midrand has since increased to 8.7% in Q2 2015, from 6.5% in Q1 2014.
The eastern nodes, including Boksburg, Kempton Park and Isando, have become established as industrial rather than office nodes, possibly contributing to the move of some corporate tenants to Waterfall. However, it is interesting to note that Greenstone – which is a fairly new node and well located within the East Rand – has not won these tenants over when considering their relocation, which may highlight the importance of location, road networks and skills pool that Waterfall offers occupiers. In a cost sensitive economic environment, Waterfall has also grown the trend of consolidating office and light industrial accommodation into one, ideal for various industries in South Africa.
It is worth mentioning that within the same period, Sandton saw an additional 144,800m2 added to its stock portfolio, and the node saw a decline in vacancies as opposed to an increase. So, rather than being a competitor to Sandton, Waterfall might be seen more as a complementary addition to the city. The ‘sector zoning’ of nodes is another factor, with Sandton being attractive to the banking, insurance and legal business service companies, whilst other sectors prefer more peripheral nodes. There may be a natural spill-over of blue-chip corporates that prefer the quality accommodation options in Waterfall, and have the option to avoid the congestion of Sandton.
You may ask what impact Waterfall is having on Johannesburg rental rates. The higher quality of accommodation provided has allowed Waterfall to enter the market at the upper end of the rental scale. The average rental rate of the node currently sits at R180/m² (gross), comparing closest to Sandton than any other node in the city, with both nodes offering the most additional stock over the past year. While a downward trend in rental rates of negatively affected nodes (such as Midrand and those of the East Rand) may have been expected, this has not been the case. The overall trend of gross rental rates in Johannesburg shows that most nodes have remained largely the same. However, rental rates have a lagged response to the changes in vacancies, meaning it could be some time before we start to see a visible downward trend in the rental rates of some of the affected nodes.
Be that as it may, research illustrates that in the long term, new nodes have been able to revolutionise cities in both the domestic and international real estate market. So what may initially look like a negative impact turns out to be a temporary ‘teething phase’ as a result of the initial shock that puts the city on a new path. The success of a new node can either elevate a city to new heights or contribute to the degradation of older nodes.
Read more about how Waterfall compares with other developments that have initiated a positive change in major cities across the globe in the latest research from JLL South Africa – Nodes that revolutionised cities: case study of Waterfall Business Estate in Johannesburg.