Nairobi’s commercial office market is constrained as developers struggle to fill up office spaces, occupancy rates and return on rentals declined by 4.8 percent and 0.1 percent in 2017-oversupply is the main culprit.
According to the recently released Nairobi Commercial Office Report, by investment company Cytonn Investments, a number of things drives Nairobi’s office market affecting its demand and supply.
Drivers of the office market in Nairobi
- SME growth
Small and Medium Sized Enterprises (SMEs) constitute 98 percent of all businesses in Kenya, they create a third of the country’s jobs and contribute 3 percent to the Gross Domestic Product (GDP) this is as per a National Economic Survey by the Central Bank of Kenya.
Thus, a growth in the number of SMEs has a direct and profound impact on office spaces, this widespread impact of the SME sector, forms part of the argument used by opposers of the law capping interest rates at 4 percent, above the central bank’s benchmark rate.
According to Cytonn’s report, the devolved system of governance has increased establishment of offices used by County Governments. Additionally, developers move to serve businesses looking to set up in county headquarters for new opportunities.
For instance, in Meru County, real estate developer Fusion Capital is developing Greenwood City worth sh3.7 billion that will house an office block, a mall and apartments; a development spurred by the opportunities of devolution.
- Foreign Direct Investment (FDI)
For the year ended December 2016 Kenya’s Foreign Direct Investment (FDI) increased by $393.4 million, including diaspora investment and company acquisitions. The report singles out Grade A offices in areas like Kilimani, Westlands and Upperhill as the main beneficiaries of foreign investment.
Factors affecting supply in the office market.
According to the report, competition is stiff between developers as more of them construct offices; this has led to a decrease in occupancy rates, in addition to increasing the bargaining power of buyers.
On the other hand, office space developers lack access to funding, which forces them to turn to debt financing. This is courtesy of the Banking Amendment Act, 2015-which brought about the capping of interest rates on bank loans, making debt finance limited in supply and has resulted in stalled projects. In the near future, this will hinder the development of office spaces.
Low availability of land for development in the traditional commercial office zones such as the Central Business District and Westlands has increased prices and instead led to increased supply of offices in previously residential areas such as Gigiri and Karen.
To counter the oversupply, developers should re-consider where they construct their offices as location determines the rates they can charge (high-paying multinationals prefer premium locations outside the CBD while SMEs prefer cheaper locations in the CBD). Additionally developers should seize more opportunities in constructing the scarcely supplied Grade A offices and explore trends such as Green buildings where they can charge more.