The demand for office spaces in Nairobi’s commercial hub fell to an eight-year low in 2019 indicating the tough economic environment in Kenya. The supply of office spaces in Nairobi has continued albeit developers scramble to attract a declining number of prospective buyers. office -building owners in the city are now struggling to attract and retain new tenants amid a rising supply of new offices. According to the Cytonn Nairobi Metropolitan Area (NMA) Commercial Office report 2020, demand for office space stood at 300,000 square feet from 3 million square feet in 2018. Available supply in the period stood at 6.7 million square feet leaving a net oversupply of 6.4 million square feet.
The decline in the sector is attributed to a worsening environment, insufficient infrastructure, delayed processing of the construction sector and insufficient access to finance. Developers remain active despite an oversupply in the commercial office markets that have cut down rental growth. According to a report by Cytonn Investments, Nairobi has an office space oversupply estimated at 3.2 million square feet and this is expected to grow by 21 per cent to 3.9 million square feet by the following year. This follows increased supply with completions growing at a five-year annual growth rate of 52.6 per cent from 2.1 million square feet in 2012 to 7.4 million square feet in 2016. The increased supply is limiting the performance with occupancy rates and yield declining as rents and prices experience slower growth rates.
The increasing supply of office spaces has presented a benefiting opportunity to tenants, especially in lease negotiations. A large amount of vacant spaces has now forced landlords to reduce their rents as well as ease lease terms. The move aims at maintaining existing tenants and attracting new ones. Moreover, the increasingly competitive market has seen newer buildings struggle to acquire tenants. Attribution of all these issues is due to poor pre-let uptake, additional stock available and delays in development. These factors may compel tenants to renew their current leases or look for other alternatives, thus having an impact on the occupancy level.
In a report, Cytonn highlighted property trends in Africa that an oversupply of office blocks has seen the average monthly cost of prime leasing space decline by 20 per cent to Sh1,648 per square metre since 2014. Major commercial office completions in 2019 fell by 65.1 per cent to 1.5 million square feet, a reflection of the continued tough environment. The market stagnation is expected to have a huge effect on investors, considering the tough operating environment for businesses with lower turnover and business restructuring which has led to several companies scaling back operations.
According to Cytonn’s report, it listed Thika Road, Mombasa Road and the Central Business District as bottoming markets experiencing very low pricing, stagnant demand and high office vacancies. Thika Road and Mombasa Road markets recorded rental yields of 6.7 per cent and 5.8 per cent respectively in 2018. The report identified Westland, Parklands, Kilimani and Upper Hill as falling markets characterized by heavy supply coupled with low demand and pricing to attract new tenants. Also, Gigiri and Karen have ranked the best-performing markets in Nairobi. The regions posted entails yields of 10.5 per cent, 9.2 per cent and 9 per cent on increased demand from companies due to the availability of high-quality spaces and relatively good infrastructure network. The worst performing areas in Nairobi included Thika Road and Mombasa road due to the lack of quality offices and the perennial traffic jams, making the zone unattractive to companies.
Grade B offices, defined as spaces with 50,000 square feet and 100,000 square feet having similar amenities to Grade A offices had the highest rental yield at 7.9 per cent due to their low asking prices. Serviced offices maintained their attraction with rental yields at 12.3 per cent due to their convenience to SMEs including flexible leases and lower set up costs. Cytonn recommends investing in specific categories of value such as office zones with a low supply like Gigiri and workplaces with high returns such as serviced offices.