Low office space demand forces landlords into discounts

The absorption of Grade A and B office space in Nairobi declined by eight per cent in the first six months of 2019 compared to similar period last year, according to a new property report.

Knight Frank’s first half market update released yesterday attributed the decline to the continued oversupply of commercial space in some locations and the current economic slowdown.

Rents for prime retail shops decreased by 5.9 per cent to $ 4.8 (Sh494) per square foot per month in the first half of 2019, while service charges across retail malls in Kenya ranged from Sh45 to Sh60/sq ft/month.

Prime commercial office rents in the city remained unchanged during the half under review at $ 1.3/ (Sh134) sqft/month.

"As a result, some landlords are providing concessions such as longer fit-out periods, partial contributions towards tenant fit-outs, or giving discounted rentals so as to retain existing tenants and attract new ones,’’ the Knight Frank report says.

Even so, the serviced office sector continued to grow as firms opt for shared workspace to cut costs as well as increased demand from SMEs, maturing start-ups and multinational firms.

‘’The increased interest is due to the flexibility that comes with serviced offices in comparison to traditional offices. Serviced offices allow organisations to have flexible lease agreements and office space, lower operating costs and the opportunity of being located in a prime address,’’ Knight Frank said.

Prime residential sale prices in Nairobi on the other hand decreased by 1.8 per cent over the first half of 2019 compared to 0.4 per cent last year, pushing the annual decline to 6.7 per cent in the year to June.

Rents also declined over the review period by 1.68 per cent compared to 0.33 per cent over a similar period in 2018, taking the annual decline to 3.3 per cent in the year to June.

The decline in both prime residential sale and rental prices is mainly attributed to the continued oversupply of residential developments in certain locations such as Karen and the ongoing credit crunch which has resulted in reduced money circulation.

These factors have transformed the market in favour of buyers and tenants, even as some multinationals continue to downsize while fewer expatriates are relocating to Kenya, impacting negatively on the niche market.

‘’The decline in rentals is mainly attributed to the current economic situation and less money in circulation, resulting in reduced spending by consumers,’’ Knight Frank said.

Additionally, oversupply of retail space in certain locations has resulted in pressure on landlords to provide concessions and other incentives to attract new or retain existing tenants, making the sub-sector a tenants’ market.

Over the review period, occupancy levels for established malls remained high at 90 per cent. New retail centres recorded occupancy levels of between 45 per cent and 55 per cent.

Dubai owned retailer Carrefour announced that in line with its expansion plans, it expects to open an additional store in the second half of 2019 on Uhuru Highway by taking over the space vacated by Nakumatt Mega.

New retail developments that opened for trading in the first half of 2019 included Sarit Centre Phase III (323,000 sq ft) and ENA Hub in Nakuru County (116,000 sq ft).

Over the review period, international retail brands continued to expand in the Kenyan market, with Turkish fashion brand LC Waikiki opening new outlets at The Junction, TRM and Sarit Centre.

The new phase of Sarit Centre also attracted other major international brands such as Swarovski and Miniso.