Nairobi office oversupply sees yields drop

Nairobi office oversupply sees yields drop

Oversupply of office spaces in most parts of Nairobi is expected to divert investments into the commercial office market as demand for office spaces within Kenya’s capital continue to plummet in 2017.

The just released Nairobi Commercial Office Report by Cytonn Investments projects a 12.6 percent increase in oversupply outweighing the current demand for office space in the capital city.

The gloomy projection is in line with last year’s performance in the commercial office market that saw an oversupply of 4.7 million sq. ft.

The oversupply in 2017 led to a 4.8 percent decline in occupancy, with yields declining to 9.2 percent.

Cytonn Investments research analyst Nancy Murule said a tough operating environment and political uncertainties in 2017 resulted in the reduced demand.

“We had the banking amendment act coming to play reducing credit supply to the private sector. Companies slowed down in their expansion measures and closing up some branches altogether and also the political uncertainties which led to investors adopting a wait-and-see attitude therefore the reduced demand,” Ms Murule said.

Upperhill, Westlands and Kilimani are among areas that have seen a rise in office space supply with most developers yet get occupancy.

The projected imbalance between supply and demand in the commercial office space will result in an estimated 0.2 percent dip in yields.

This is despite an increase in demand following the completion of the electioneering period that has brought about an economic resurgence in the country.

Cytonn Partner Patricia Wanjama said she expects Kenya’s market to finally pick-up in the next 3 to 5 years although opportunities still exist in differentiated office concepts such as serviced and green offices.

“We recommend investments only for the long-term and in specific pockets of value such as the differentiated concepts like serviced offices which have higher returns at 13.4 percent compared to conventional office space and also in green offices which charge a higher rent and are expected to have higher occupancies in future,” Ms. Wanjama said.

Opportunities in commercial office spaces also exist in zones will low supply but high returns within the city such as Karen and Gigiri.

Key drivers for the office sector remain as devolution, Nairobi as a regional hub, growth of small and medium enterprises and increased foreign domestic investments.