Uptake of commercial office space declined last year as a result of a tough economic environment, a new report has shown.
The Cytonn Real Estate, Nairobi Metropolitan Area (NMA) Commercial Office Report 2020 dubbed Supply-Driven Market shows.
The study reveals that in 2019, the commercial office sector performance eased with rental yields dropping to 7.7 per cent compared to 8.3 per cent in 2018.
The drop was attributed to slower uptake of office space during the year as tenants faced a tough financial environment coupled with an oversupply of 6.3 million square feet.
This has, in turn, created a bargaining chip for potential tenants in the market, forcing landlords to lower rents.
“The outlook for the Commercial Office sector is negative given the current office space oversupply and expected stagnation in performance in 2020 given the current Coronavirus pandemic,” Cytonn Investments research analyst Wacu Mbugua said.
She added that with the Coronavirus, many corporates have also now tested working from home.
As a result, occupancy levels are unlikely to recover to the levels they used to be at previously.
“We expect a slowdown in construction activities allowing the existing demand to absorb the current supply,” Wambugu said.
The research was conducted in Westlands, Kilimani, Karen, Parklands, Thika Road, Upperhill, Nairobi Central Business District (CBD), Gigiri, and Mombasa Road.
Gigiri, Karen, and Westlands were the best performers in 2019 recording rental yields of 9.2, 8.3, and 8.3 per cent respectively.
This was attributed to increased demand by businesses and multinational companies due to their proximity to the Central Business District (CBD), relatively good infrastructure network, superior locations and availability of quality Grade A offices.
According to the report, the investment opportunity within the Nairobi Metropolitan Area is in areas with low supply and high returns such as Gigiri and in differentiated concepts such as mixed-use developments and serviced offices recording rental yields of up to 7.9 per cent and 12.3 per cent respectively.
Thika Road and Mombasa Road were the worst performers recording rental yields of 6.3 per cent and 5.5 per cent respectively.
This was attributed to poor location as a result of traffic congestions, the Mombasa Road’s zoning for industrial use, and lower quality office space.
"This made the locations generally unattractive to firms," Wambugu said.
