While there has been a more positive feeling surrounding the office space market in 2013, the same trends continued from last year in most sectors of the market, writes Ollie Collins, investment and commercial leasing agent at International Realty Group (IRG).
Absorption rates have remained consistent with last year and we see many firms continuing to upgrade the space they occupy. Office sizes are shrinking in direct response to advancements in technology, which have allowed many administration and back office work to be performed in lower cost jurisdictions. Changing working environments has also become more apparent with firms seeking a higher ratio of open space to individual offices.
Class A office space remains extremely strong. Vacancy rates have dropped slightly from last year and remain well below 5 per cent. Although we have not seen an increase in base rental rates in the class A market over the last 12 months, the gross occupancy cost for tenants has increased due to the increase in common area maintenance (CAM) charges.
The class A office space base rent (before taxes, maintenance and insurance), is now comparable with midtown New York and the West End of London. These rents are only sustainable if the Cayman financial services sector continues to attract high margin business. The recently released government statistics for 2012 show some encouragement in this regard, namely, an increase in the total employed population and an increase in company registries, both exempt and foreign and resident companies. These increases, combined with a burgeoning insurance and reinsurance sector indicates that the class A office space market continues to look bright in the short to medium term.
The class B office space market remains in a state of depression. This sector suffers from a high vacancy rate and lower net rents. There is currently over 200,000 square feet of class B office space available for lease, equating to a vacancy rate of 18 per cent. With the current annual absorption rate of class B space at 50,000-60,000 square feet, it leaves the market with nearly a four-year supply.
Realistically, barring a huge expansion in the world economy, some of this class B office space will never again be leased as office space. For many buildings, there may be a higher use as residential, retail or institutional spaces. The new cruise ship port combined with a thoughtful and targeted regeneration of central George Town will allow some of these buildings to consider a change of use which would be beneficial for landlords and residents alike.
Some class B landlords have begun to review infrastructure and initiate capital improvement programs to compete and retain tenants, but even with these improvements we believe they will need to consider increasing concession packages to attract new tenant’s. “One man’s gain is another man’s loss” in an increasingly competitive game of musical chairs continues to depict Cayman’s office space market with the class B market feeling the brunt of this merry go round.