Absorption of high grade offices drops on oversupply

Office aisle with cubicles and tables.

The uptake of commercial offices fell by nearly half in 2020, owing to continued oversupply and the work-from-home revolution brought about by the Covid-19 pandemic.

According to the Knight Frank Kenya Market Update for the second half of 2020, absorption of Grade A and B office space decreased by 50 per cent, compared to 2019.

This saw prime commercial office rents in Nairobi drop from Sh142 per square foot monthly to Sh123 in the second half of the year.

“The decline in office uptake and rental values is mainly attributed to the continued oversupply of commercial space in some locations, the ongoing economic climate, and tightened restrictions implemented in the second quarter of 2020,” said the report.

This affected business operations and resulted in majority of occupiers halting their space requirements due to most of their staff working remotely.

However, absorption of the high-grade offices rose by 13 per cent, compared to the first half of 2020, owing to the measured reopening of the economy.

“This was mainly due to the lifting of lockdown measures and the gradual reopening of businesses, allowing international and local occupiers to proceed with key business decisions and finalise transactions,” Knight Frank said.

“This trend is expected to continue in the first half of 2021 from both local and international tenants, as the economy fully reopens, the Covid-19 vaccine is rolled out and the expected rebound of the Kenyan economy.”

Offered concessions

The average occupancy rates across commercial buildings at the end of the year stood at about 72 per cent. 

“Landlords, over the review period, were open to negotiations and offering concessions such as free fit-out periods and freezing of escalations to retain and attract new tenants due to the current economic climate and increased competition,” said the report.

Prime residential rents also fell sharply by 10.25 per cent, compared to 2.8 per cent in 2019.

“Rental prices for this niche market have been steadily declining since 2018, and this is mainly attributed to the continued oversupply of rental properties, less disposable income due to the unfavourable economic climate, budget cuts from multinationals and fewer expatriates in the country, as a significant number relocated back to their home countries in the first half of 2020 due to the pandemic,” said Knight Frank.

Prime residential sale prices in Nairobi fell by 3.9 per cent in 2020, compared to four per cent in 2019, with the segment remaining a buyers’ market. 

This was mainly attributed to an increase in market activity over the second half of 2020, specifically from developers and sellers who became more flexible and were willing to negotiate lower prices with potential buyers.

“The slower but steady decline is indicative that sale prices for this niche market were stabilising. However, due the continued oversupply of residential developments in certain locations, this niche sector remains a buyers’ market.”