The coronavirus pandemic has dealt a big blow to Kenya’s commercial property market that was already suffering from glut.
As late as 2019, property developers and landlords in Nairobi and other major urban centres were already counting losses as over-production of new office space amidst an economic slowdown eroded margins and left units empty.
“Prime commercial office rents in Nairobi remained unchanged in the first half of 2019 at $1.3 (Sh130) for a square foot per month,” said real estate managers Knight Frank in its market update for the first half of last year.
“Absorption of Grade A and B office space in Nairobi declined by eight per cent in the period compared to the second half of 2018.”
According to Knight Frank, some landlords were forced to give concessions such as longer fit-out periods, partial contributions towards tenant fit-outs or giving discounted rentals to retain existing tenants and attract new ones.
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This was more than six months before the coronavirus pandemic struck.
With many companies considering extending work-from-home requirements for their employees indefinitely and business premises standing empty from thinning clients, developers and investors are worried that the long-feared market correction could be on its way.
“There have been questions raised about the future of the office market with everybody working from home and commercial buildings staying empty, but I don’t think this is the case,” said Knight Frank Chief Executive Ben Woodhams in an interview with Home&Away.
“We have been advising a very big client in Nairobi who occupies space in a number of buildings and they were looking to consolidate their buildings and thought they needed 400,000 square feet.”
Woodhams said the company later reviewed its demand downwards to 250,000 square feet after considering the current market conditions, and a similar trend is likely to replicate across the sector.
Hannah Clifford, co-founder of co-working space Nairobi Garage told Home & Away that many start-ups have managed to adapt their businesses to the new working conditions brought about by the pandemic despite the disruption to most physical operations.
“At the outbreak of Covid-19 in Kenya, many of our members opted to work from home and many companies that were looking at taking up space hit a pause,” she said.
“We’ve been impacted in terms of the spaces being very quiet - no events, very few meeting room bookings - but have had relatively few cancellations.”
Clifford said the market is showing signs of recovery as the initial shock of the pandemic starts to wear off and businesses are now getting back to work.
Other entrepreneurs are turning to new models of using rental space on-the-go.
One of them is Drop Spot, a small, three square-feet stall on the third floor of Moi Avenue’s new Sawa Mall.
The stall is sparsely furnished with just a small desk and rows of shelves that are neatly divided into identical square foot compartments, where a range of goods are stored.
It is just one of several stalls that have cropped up in the exhibition malls of downtown Nairobi where, for as low as Sh2,500 per month, one can get their own dedicated shelf space in the CBD.
Such stalls have become popular with online merchants, particularly young entrepreneurs running fashion and accessories stores on social media sites like Instagram and Twitter.
Consumers make the purchase via the online stores and are directed to one of the pick-up stalls to collect their purchase.
This saves many online merchants the need to have premises in the city centre and the costs that come with it.
Woodhams said the disruption to the commercial property market experienced in the last six months will ultimately push stakeholders to re-imagine the future of office and retail spaces.
“The office building is still extremely important,” he said. “How we use it will be different for sure and while organisations will require less space, Nairobi being a regional hub will still have new organisations coming in and demand for space.”
The over-development in malls and big retail spaces before the coronavirus pandemic, however, could spell trouble for major players.
“There still isn’t a lot of activities one can do in Nairobi and malls will remain important as lifestyle destinations,” said Woodhams.
“People focus more on the lifestyle aspect of malls and those are the parts that have been hit the most by Covid-19. Gyms, casinos, cinemas will come back and when they do, will drive recovery.”
Clifford says the government should consider giving incentives and reprieves to the real estate sector to hasten the recovery process.
“The government could help by signalling to banks to place a moratorium on loans for commercial buildings - which would, in turn, allow landlords to pass breaks on to their tenants,” she said.
“The longer-term value to businesses, however, would be a shift in the mindset of landlords and real estate agents over the cost of their premises versus the services, quality of building and lack of flexibility being offered.”
Clifford further said working from home is not the practical scenario for everyone and there is need for the labour market to explore a mix of the traditional office space and the future ushered in by the current circumstances.
“There will be increased demand for flexibility, and therefore the traditional office space landlord will have a much harder time to convince people to sign leases,” she said.
“There will be an increased focus on flexible work strategies, which sees more businesses considering working in a remote or dispersed fashion.
This could mean co-working spaces become a secondary space to offer employees options other than working from home or coming to the main office.
Clifford said the Nairobi Garage had put on hold opening new locations at the onset of the pandemic but is not scrapping the plan.
“We are getting quite some bit of demand from firms whose leases are up for renewal this year and they’re eager to move to a flexible arrangement and even ‘traditional’ companies that are planning a satellite office strategy,” she said.