Something is happening in the commercial office space market, and it is not rosy.
A combination of an oversupply of commercial rental space, changing working arrangements where employees are free to work from home and the harsh economic conditions where companies are scaling down on office space expenditure is witnessing empty units for days on end, low or no sales of office space and a significant reduction in rental returns.
Property finance experts, office space owners and agencies are reporting reduced business with projections showing that the trend is not about to change until sometime in early 2025.
“It is really tough for companies that own some of these units. Sales have dropped, unoccupied rental spaces have increased as the traditional office space undergoes a metamorphosis in terms of use and location preference,” said Arthur Ombati, a property finance expert.
“Companies are offering discounts, making concessions on payment of utilities including offers such as additional parking or extended periods of rent payment. When anchor tenants leave or reduce the space they occupy, things start to become interesting in terms of income to the property managers and owners of the commercial units.”
Among the most affected are the legacy buildings in the central business district that have seen their anchor tenants reduce space or relocate, either to their own buildings or to other parts of town.
Many buildings in the central business district and office nodes have no tenants past the third floor.
And the metamorphosis is not just confined to Nairobi. The effect is being felt across major cities and towns in the country, property experts say and nowhere seems to be shielded from the current meltdown save for upcoming county headquarters although it is more pronounced in Nairobi.
Protus Nyawaya, the proprietor of Proam Real Estate, a property agency, says that commercial office glut refers to a scenario where there is an oversupply of commercial office space but demand for such offices has dropped due to a number of factors.
“The impact of commercial office glut has been felt in areas where property values were already high,” said Nyamwaya.
“The oversupply of office space has led to a decrease in the value of commercial properties, causing landlords and property managers to reduce rents and offer incentives to attract tenants. Moreover, a shift to remote working arrangements has also affected commercial real estate including design, construction, and furnishings.”
Property experts say that as companies continue to adopt remote working and even hybrid models of both working from home and the office, demand for office space will continue to drop.
A report by real estate firm Knight Frank at the end of 2022 forecasting 2023 and beyond however gives reasons to be hopeful.
According to the report, after the devastating effects of Covid-19, Kenya's General Elections and the war in Ukraine, African economies —Kenya included—are beginning to return to normalcy.
The report indicates spiralling inflation, working-from-home patterns, rising unemployment rates and the ongoing devaluation of local currencies as the key threats to the commercial sub-sector.
New demand drivers
The report has however identified data centres and modern logistics facilities that are quickly emerging as new demand drivers in Kenya, Nigeria, and South Africa.
“Investors, developers and landlords are responding to rising requirements by expanding existing data centres and building high-quality warehouses which remain in short supply,” says the report authored by Boniface Abudho, a senior research analyst at Knight Frank.
“A closer look at Nairobi indicates that there is rising demand for cloud storage requirements as businesses rapidly expand their online platforms driving a surge in data centre requirements.”
Africa Data Centre (ADC) for instance has announced an investment in excess of $200 million for data centres in Nairobi.
The report also projects that there is a growing demand for best-in-class office space in prime office buildings and office structures that are changing climate conscious which supply remain short.
But while the commercial sub-sector struggles to find its footing in the quickly changing investment environment, those who are well versed in the property business say that some of the low-hanging fruits that landlords can adopt are flexible lease and working space formulations.
“Landlords who continue to stick to the traditional, lengthy and rigorous lease requirements that are cumbersome to put in place will continue to lose out in favour of a workforce that is looking for easy quick to agree on lease agreements whose timing is flexible,” said Ombati.
