The unsettling scenes witnessed during the recent lockdown, with once-thriving streets and commercial districts totally devoid of activity, brought the message home loud and clear: businesses need a thriving property market and vice versa. The relationship between economic activity and commercial property depends in the main on two general factors that play a large role in a company’s decision where to locate: accessibility and agglomeration or clustering.
As the post-lockdown recovery gains momentum, and South Africans begin to head back to shopping malls,now could be the best time to consider the interplay between business activities and the premises that make it possible.
In this article we’ll take a deep dive into the complex relationship between the economy and commercial property and how these two elements rely on each other to drive future growth and commercial development.
The ideal space for businesses and communities to prosper together
Every commercial property – from a small local shop to a high-rise corporate headquarters – plays a vital role in the local economy of the surrounding area.
Office buildings, shopping malls, factories and industrial parks are so ubiquitous that we tend to take them for granted.
However, in reality, they exist thanks to an intricate interaction of public sector investment (in the form of infrastructure) as well as the business initiatives of local entrepreneurs and corporations that create the demand for commercial space in the first place.
In order for an area to host a thriving commercial property market, several conditions need to be met:
- There have to be sufficient tenants with an interest in occupying the premises.
- They need to have the means to pay rent at a price point that makes financial sense to the property owner.
These two important criteria will usually be met automatically if businesses in the local economy are profitable and growing.
In the best-case scenario, property enhances profit by providing businesses with premises that attract clients and customers while offering a location that’s convenient for their suppliers too.
How much rent can a prospective tenant afford?
Affordability is an easy concept to talk about in abstract terms – but how much should a typical business be expected to pay for the rental of its premises?
- In general, a maximum of 10% of a company’s turnover should be allocated to its rent expenses in order to keep monthly overheads in check and ensure a healthy cash flow.
- Developers and property owners should keep this in mind when pricing their premises – especially in the fragile COVID economy.
What economic factors determine the structure of a business district?
From the Cape Town Foreshore to Manhattan, there are several universal economic considerations that influence the size, nature and financial success of every commercial building:
- The unique nature of the business – be it a corporate office, a trending bakery, or an e-commerce warehousing facility.
- Access to essential economic inputs. These include labour, raw materials, and the use of transportation infrastructure.
- The availability of suitable space – at a price that allows the business to remain profitable and grow.
The ideal business premises is one that allows companies to maximise their profit by lowering costs and boosting income.
This can be achieved by providing easy access to suppliers and raw materials (in the case of a manufacturing business) by virtue of the building’s geographical location and proximity to transportation infrastructure, such as airport hubs and rail networks.
A location and property that is attractive to potential clients may also help a business to boost its revenues by attracting more business or by giving the company perceived credibility to serve a more affluent client base.
Why do similar business types and commercial buildings tend to exist in clusters?
The familiar sight of several office towers looming large against the Cape Town city skyline or a row of shops at an outlet mall selling similar products can easily be explained by the economics of commercial real estate outlined above.
Buildings that share a convenient or business-enhancing location can provide similar benefits to their tenants simply by being in the right place – which explains the old real estate mantra: “location, location, location”.
- Retail and office spaces tend to cluster together based on complementarity (all the shops you need under one roof) or compatibility (professional services like legal and accounting firms or doctors, dentists and physiotherapists occupying the same premises).
- Industrial properties tend to cluster because of shared economic considerations: urbanisation (which means that certain industries find it more profitable to manufacture near the cities where many of their end users live) and localisation (typically with one large manufacturer surrounded by smaller suppliers).
Discover more insights from the Commercial Space team
Finding the ideal office or industrial site is easier when you have a knowledgeable and experienced agent at hand. Our team of area specialists have decades of collective experience and are waiting to share their insights with you as you search for your new premises.
To find out more about the Cape Town commercial property sector or to start your business relocation in earnest, contact us today.