Economy

Office, mall rents plunge on jump in space supply

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Stanlib Fahari I-Reit investor briefing at the Nairobi Serena Hotel on March 29. PHOTO | DIANA NGILA | NMG

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Summary

  • This has left mall and office landlords with subdued earnings, signalling the end of a property boom that offered investors double-digit returns.
  • The lower rents are, however, a relief to business owners seeking reduced operation costs as they navigate the recovery with eyes on a return to profitability.
  • Ilam Fahari I-Reit reckons the oversupply of new developments has offered tenants leverage over landlords, especially in areas with high vacancy levels, with many now renegotiating rates in what has firmly become a buyers’ market.

The cost of renting space in malls and offices has dropped, defying the ongoing economic recovery from Covid--19 hardships and return of workers and students.

Listed property investor Ilam Fahari I-Reit #ticker:FAHR says office rent in top-grade buildings has dropped by an average of 16.9 percent over the past four years on increased supply.

This has left mall and office landlords with subdued earnings, signalling the end of a property boom that offered investors double-digit returns.

The lower rents are, however, a relief to business owners seeking reduced operation costs as they navigate the recovery with eyes on a return to profitability.

Ilam Fahari I-Reit reckons the oversupply of new developments has offered tenants leverage over landlords, especially in areas with high vacancy levels, with many now renegotiating rates in what has firmly become a buyers’ market.

Average asking rates for Grade A office space fell to $1.20 (Sh138) per square foot at the end of last year from $1.40 (Sh161.40) four years earlier, property market data from realtor Knight Frank Kenya shows.

"Despite the apparent pockets of stability and resilience in the office market, we expect headline rents to remain subdued for the remainder of 2022. We also expect that the occupancy rates will fall because of the large amount of space released in the market towards the end of 2021," said Ilam Fahari I-Reit.

"Going forward, occupiers are expected to keep good leverage towards landlords in the short term."

The completion of the 42-floor Global Trade Centre (GTC)—a mixed-use development that comprises office, retail, hotel and residential property — has injected about 625,000 square feet of new office space in Nairobi.

Other buildings that have recently introduced bulk office space in Nairobi are the National Social Security Fund (NSSF)-owned Hazina Trade Centre in the central business district at 234,000 square feet, the Convex (250,000 square feet) and Riverside Square (94,000 square feet) in Riverside area.

"The availability of higher quality more recently completed stock has also negatively impacted rentals in older buildings throughout the city," said Ilam Fahari I-Reit.

Demand for commercial properties in business districts like Upper Hill and Westlands dropped during the pandemic lockdowns, which shed jobs and prompted some of the remaining staff to work from home.

While a majority of businesses have resumed full activity and are hiring workers who lost jobs during the pandemic, some still retain the remote working plans, leaving SMEs as the drivers of office space demand.

It was expected the gradual return to the office and the economic recovery that came with the winding down of Covid restrictions would boost the rental market.

Small firms are, however, unlikely to tap massively into the Grade A office market due to their limited financial power.

Malls have also been hurt by the adoption of online shopping that rose during the Covid period.

The segment has seen a number of large retailers such as Nakumatt and Tuskys close shop, while South African chain Shoprite and Botswana-based Choppies have exited the Kenya market.

This has cut demand for anchor space in new developments that have come up around the city in recent years, hurting rental price growth.

Ilam Fahari I-Reit expects that the negative impact on the sector will still be felt over the short to medium term.

"Sitting tenants continued to renegotiate rents, which led to a drop in passing rents, especially in centres with high vacancies. Market rents remained flat or reduced while vacancies took longer to fill than initially anticipated," said the fund manager.

Industrial property developers have, however, fared better, helped by demand for high quality warehouse space, including by businesses that are carrying out online retail trade.

Asking rents for industrial space remained unchanged at $0.6 (Sh69) per square foot in 2021, but is likely to go up with demand for top-quality warehouses still eclipsing supply, Ilam Fahari I-Reit said.

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