Glut in office space hurts real estate returns

The rapid development of commercial property occasioned by the robust growth two years ago has led to a glut in the market.

More floor space is being created than can be taken up by tenants, raising fears of a downward pressure in prices, increase in unoccupied space and a halt in the previously vibrant and lucrative segment of the property market.

“Currently, there are an estimated 1.5 million square feet of commercial floor under development which is expected to be released while the market is already reeling from an oversupply binge,” said Mr Frank Ireri, the managing director of Housing Finance.

The rush to provide commercial property was largely driven by the robust growth of the economy which peaked 7.1 per cent in 2007 from a low of two per cent in 2002.

With a growing economy came the need for more space to expand business operations through opening up of new outlets, launching of new businesses and upgrading existing ventures.

At the early stages, the rapid growth of commercial space found immediate uptake as offices relocated from their Nairobi Central Business District to more spacious and less crowded locations such as the serene Upper Hill, Westlands and Ngong Road.

Similarly, demand for fancy and huge office space went up as major businesses rebranded their operations buoyed by cut-throat competition in areas like banking that saw foreign firms open local branches.

The jutting of commercial properties on every open space in Upper Hill, Westlands and on Ngong Road area was largely to meet the growing needs.

On the other hand, businesses especially retail operators such as supermarkets, pharmacies, food outlets, petrol stations and groceries expanded into the outskirts of the city to be nearer to their customers.

To meet the growing needs of such businesses, property developers have erected such premises in residential locations thereby supplying shopping floor to prospective businesses.

With demand for more space which invariably raised the overall expenditure, businesses opted to put up their office blocks to not only reduce the recurrent rental expenses but also tap into their excess space from organisations that were hunting for exclusivity and wiser spaces.

Other than reduce the recurrent cost of rental payment, parastatals, companies and other lobbies have in the process brought to the market the excess space not occupied to also earn passive income.

“The rapid construction of office blocks principally by businesses has reduced the uptake of rental space as these businesses not only occupy their premises but also offload the additional rental floor space to earn passive income unlike in the past where they would be renting offices”, said Mr Ireri.

The flipside of this new development has been the off loading of previously occupied space to the market while at the same time bringing more space into the market thereby leading to the glut.

With a much slower uptake rate than completion rate of commercial properties, the once lucrative investment is likely to see investors lose out on their expected return on investment.