Prime office rent flat as oversupply hurts recovery boon

Prime office developers kept their asking rents flat, even as occupancy rates increased, making investors in commercial space miss out on the double-digit returns being witnessed by their peers in other segments of real estate.

This is after players in the office space category battled to attract new tenants and reduce the volume of idle space in an oversupplied market.

A new report on Kenya’s property sector by Knight Frank shows that the prime asking rent for Grade A offices remained unchanged at $1.20 (Sh192) per square foot, attributed by the firm to tough economic conditions.

Read: Multinationals lift demand for high-end Nairobi offices

This upper price level is expected to prevail this year, even as developers cut back on new projects due to the oversupply and rising cost of capital, especially for those utilising dollar loans whose cost has been affected by a weakening shilling.

“Historically, office take-up was slow due to economic challenges exacerbated by oversupply. However, this situation is gradually changing, with prime office monthly rent in Nairobi remaining stable at $1.20 per square foot and office occupancy rates increasing from 71.5 percent in the first half of 2023 to 76.5 percent in the second half of 2023,” said Knight Frank.

“This was largely attributed to the absorption of space in recently completed A-grade developments even as B-grade office developments continued to face challenges.”

Kenya saw a steady increase in the supply of Grade A office space from 2010 as the country established itself as a regional hub for international investors, governments, diplomatic missions, and multinational corporations.

This led to the rapid expansion of the commercial hubs of Upper Hill and Westlands, which attracted businesses away from the Nairobi central business district (CBD) where accessibility and supply of Grade A offices were limited.

The Covid-19 pandemic, however, upended the commercial property market as many firms adopted remote working arrangements, with the subsequent economic difficulties further eating into demand for space.

Many firms in Nairobi also shifted to smaller fitted-out office spaces as flexible working patterns became the new normal. This saw landlords grant concessions on lease renewals, including cutting rents in a bid to attract and retain tenants.

The stagnation in office rents has denied developers in the commercial office segment the lucrative returns being enjoyed in the other segments of real estate investments, including land and residential houses.

Property price analysis done by realtor HassConsult shows that house prices across all segments rose by 4.1 percent in the three months to December 2023, a level last seen in the first quarter of 2016 when prices went up by 4.2 percent.

The data also shows that land prices in six satellite towns around Nairobi rose by double digits last year, giving holders an annual return that matched those on high-yielding government bonds that were the preferred option for investors in a difficult investment market.

New land price data compiled by HassConsult shows that the price of an acre in Ngong appreciated by 21.4 percent in 2023 to Sh35 million, while in Thika, an acre rose by 17.8 percent to Sh27.2 million. In Syokimau, the price of an acre of land appreciated 15.8 percent to Sh32.7 million in 2023.

Three other towns, Mlolongo, Kitengela, and Athi River, recorded price increases of between 10.5 percent and 10.9 percent last year.

In comparison, government bonds issued in 2023 paid investors between 12.9 percent and 18 percent in interest, while the one-year Treasury bill yield ranged between 10.4 percent and 15.9 percent.

The weakening of the shilling against the dollar has also become a problem for developers who are exposed to foreign currency debt.

Those who collect their rent in shillings suffer exchange losses when converting their dues to dollars to service the loans. To avoid these exchange losses, they have resorted to collecting rent in dollars.

Read: Nairobi’s prime office rent drops on remote working

“In response to this exchange rate challenge, landlords have increasingly favoured collecting rent in dollars, a trend expected to continue in the long term,” said Knight Frank.

This, however, exposes tenants to higher costs associated with sourcing for the greenback to make their rent payments, further hurting the prospects of a significant uptick in demand for office space.

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