Over the years, Nairobi's development pipeline has gone through multiple cycles.
The last decade saw a commercial office boom, then a retail one to now a shift in buildings focused on flexibility, accessibility and affordability.
This is contained in the Nairobi Development Pipeline Report compiled by pan-African real estate data company Estate Intel in collaboration with Axis Real Estate.
Estate Intel Research Associate Tilda Mwai said that initially, development cycles were underpinned by the entry of global capital in emerging markets.
Rising demographics
"However, Nairobi's rising demographics have largely made the case for the shift in focus to alternative sectors such as data centres, flexible office spaces, neighbourhood shopping malls (plazas and supermarkets), purpose-built warehousing and affordable housing presenting new opportunities to developers," said Ms Mwai.
The report shows that data centres have seen their market supply increase to approximately 10 megawatts. Eighty per cent of this stock has come up over the last five years, with the development pipeline looking even more promising at approximately 470 per cent of total stock, said the findings.
The industrial sector has also continued to boom as one of Nairobi's leading real estate sectors.
Developers' interest matched with occupier demand, especially in the SMEs, agricultural and fast-moving consumer goods (FMCG) sectors means that there are unlimited opportunities in the market for investors.
However, the industrial market, with only 11 per cent of the total stock estimated at 17 million square feet under development, remains largely undersupplied with regard to purpose-built warehousing, says the report.
This has seen investors increasingly explore the space with private equity or investor-operator-type models.
Over 80 per cent of the projects in the pipeline tracked by Estate Intel are already under construction, while the others remain conceptual.
Traditional sectors such as commercial offices are currently oversupplied, noted the researchers.
The office sector has an estimated 2.4 million square feet under development in 2022, which accounts for approximately 20 per cent of the total stock.
Combined with low take-up activity, due to rising inflation and election-related uncertainty, the market has a clear existing supply glut, added Estate Intel.
Tenant driven market
"Generally, the market remains largely tenant driven with key markets such as Kilimani and Westlands recording little to no growth in rents estimated at negative 0.4 per cent and 0.5 per cent respectively over the past five years," said Axis Real Estate Managing Director Gikonyo Gitonga.
"Interestingly, Grade A offices continue to reflect relatively lower vacancy levels estimated at 20 per cent.
"This has been underpinned by the flight to a quality trend that has continued to drive occupier preferences for grade A offices, with major occupiers especially multinationals opting to take up space in this segment."
The researchers noted that the development pipeline in the retail sector seems to have "dried up" altogether. This is as a large proportion (64 per cent) of the development pipeline is on hold potentially due to the existing oversupply since around 2016 and 2018 that has seen total stock accumulate to approximately 6.9 million square feet, said the researchers.
"Interestingly, Nairobi continues to feature as one of the leading retail hubs across sub-Saharan Africa with a retail density estimated at 0.14, higher than most cities in Africa such as Lagos and Accra which have a recorded density of 0.018 and 0.06 respectively," said Ms Mwai.
"While the future may not be as positive for the market, product differentiation by developers will create all the difference."
On the outlook for the property market, Estate Intel points to the current macroeconomic environment as the main driving factor.
Reduced activity
"While Nairobi is often regarded as the gateway to East Africa due to its favourable economic policies and tourist-friendly tone, election-related uncertainty, currency devaluation as well as rising inflation rates have impacted general transaction activity, especially in the office, retail and residential sectors," Ms Mwai said.
"This currency devaluation has led to challenges that include but are not limited to, an increase in construction costs and slowed down project financing.
"However, with the right balance in measures and incentives, market activity could pick up during the course of the year," she said.
