Construction boom leaves Nairobi in office space glut

Nairobi is expected to have a glut of office space in the next two years with more than 2.8 million square feet vacant in upmarket Upper Hill and Westlands areas of the city.

Mentor Management Ltd (MML), a property development firm, said Thursday that a number of offices in Nairobi’s Upper Hill area will be particularly affected.

In its second Office Market Report for 2014, MML said that Upper Hill was entering the peaking phase of development which is characterised by supply exceeding demand by at least 20 per cent.

‘‘This excess supply of office space is expected to originate from Upper Hill and Westlands during 2015,” said MML chief executive James Hodell.

The report said that Upper Hill and Westlands will supply 64 per cent or 1.8 million square feet of the 2.8 million office space that is expected to come into the market by the end of 2016.

“We predict that by the end of 2016 there will be over 2.8 million square feet of office space — 19 per cent of the total stock of new buildings delivered since 2009 — lying vacant.

Properties in Upper Hill and Westlands that are easily finding occupancy are those of high quality and have ample parking space but are charging higher rents.

High rent increases

The international accepted parking ratio for ‘Grade A’ offices is four square feet for every 1,000 square feet, and only one in 20 buildings in Nairobi has met this ratio, enabling them to charge higher rents.

The report also found that the two districts had the highest year-to-date rent increases, both averaging 17 per cent. Rents in Upper Hill rose to Sh105 from Sh90 per square foot, while in Westlands they increased to Sh117 from Sh100. KCB, Britam, UAP and Fusion Group are some of the firms that are putting up huge office blocks in Upper Hill.

The area is also home to the World Bank Group, Coca-Cola, CBA, Equity Bank, CIC Insurance and Shelter Afrique.

Poor infrastructure and low quality buildings in addition to lack of parking space affect occupancy levels. MML had earlier said that these factors had made the Central Business District (CBD) unattractive.

MML’s first report, released in February, said that oversupply would affect occupancy and pointed out that poor infrastructure, especially in the CBD, was the top factor affecting occupancy.

READ: Heavy traffic takes glamour off central Nairobi offices

The government is expanding the road network but tenants will still feel effects of congested roads since infrastructure development is normally a step behind private sector investment, said Mr Hodell.

Property development firms are putting up offices as a reaction to demand for high quality buildings from multi-national companies setting up base in Nairobi.

Karen, Waiyaki Way and Mombasa Road are the other nodes the report looked at.

Offices also offer higher rental yields than other non-residential properties such as industrial properties.

Data from Broll Kenya, a property management firm that is 30 per cent owned by Centum Investments, shows that offices have rental yields of between nine and 11 per cent against industrial properties which have yields of between 7.5 and 10 per cent.

Highest yields

Retail premises have the highest rental yields at between 11 and 12 per cent.

Other property management firms however said that Nairobi is a prime destination for investors in commercial property due to rapid urbanisation, an increase in foreign firms opening shop and the developing oil and gas industry.

“We expect to see Africa’s mature markets of Kenya, and Nairobi in particular, Botswana, South Africa and Nigeria to benefit. Cape Town, Johannesburg and Lagos are all strategic hubs as is Dubai as it services a growing flow of African investment capital,” said property managers Knight Frank head of commercial report James Roberts when releasing the Global Cities report in September.