Nairobi Faces Office Glut
Kenya Capital City Nairobi is likely to struggle with glut of office space starting 2015, a new report has revealed.
Mentor Management Limited (MML) said Thursday in its Nairobi Office Market Report for the second half of 2014 that real estate specialists now predict overbuilding could leave close to a fifth of the city’s newly built offices vacant by the end of 2016, principally in Upper Hill and Westlands.
“We predict that by the end of 2016, there will be over 2.8m square feet of office space – 19 per cent of the total stock of new buildings delivered since 2009 – lying vacant. This excess supply of office space is expected to originate from Upper Hill and Westlands during 2015,” said the MML report, entitled Nairobi Commercial Office Property Report: On the Brink of Oversupply.
Since 2011, sub-Saharan Africas most experienced private equity real estate investor, Actis, has held a controlling interest in MML, which was originally launched in 1987 as the first project management business in East Africa.
Today, more than 20,000 East Africans work in offices and malls built by MML, 10,000 live in homes built by MML, and the hotels built by the group have provided more than 5 million tourist nights.
The group, which runs its own real estate research arm, last year launched its twice yearly commercial office property.
MML has since identified nine office nodes in and around Nairobi, as the city moves towards a structure built around multiple centres, and away from its historic form as a single-centre city.
In most of the nodes, Grade A office buildings with ample parking facilities are still filling up quickly, the group reported.
Using the globally recognised Jones Lang LaSalle Office Clock, which captures the cyclical nature of the commercial building cycle, MML reported that the five office nodes of Kilimani & Ngong Road, Waiyaki Way, Gigiri, Karen, and Thika Road were all still in a rising phase, while both Mombasa Road and CBD were now in a bottoming out phase, which may see these areas start to rise again in coming years, should planned infrastructure developments be forthcoming.
However, both Upper Hill, and, behind it, Westlands, were now in the peaking phase of the clock, reported MML.
During 2014, the best performing office markets were Kilimani, which enjoyed 84 per cent take up on the new offices delivered, and Westlands at 71 per cent take up.
The year also brought an acceleration in office building in the city’s outer suburbs, with Gigiri, Thika Road and Karen accounting for more than a quarter of all new office buildings delivered in and around Nairobi this year.
The construction of Nairobi office buildings is, however, set to slow. MML reported that planning approvals for new Nairobi office buildings fell by 73 per cent this year, from their all-time peak of 7m square feet in 2013.
Only northern Nairobi is set to continue to experience intense office construction, with three quarters of this year’s new office planning approvals falling in Gigiri, Westlands and Waiyaki Way.
Westlands and Upper Hill saw the largest increases in office rents at 17 per cent year-on-year growth in average office rents, with Westlands offices now averaging Sh117 per square foot and running as high as Sh220 per square foot, while average Upper Hill office rents rose from Sh90 per square foot to Sh105.
“However, the absolute determinant in how quickly new office buildings are filling, beyond the baseline of the location and quality of the building, is the availability of ample parking,” said James Hoddell, MML CEO.
Only 5 per cent, or 1 in 20, of the city’s new office buildings yet meet the minimum international standards for parking, yet there is an absolute relationship between ample parking and speedy uptake.
Half of the entire city’s office buildings with adequate parking ratios are in Westlands, while CBD accounts for three quarters of the city’s buildings with the lowest parking ratios.
“Having surveyed hundreds of office buildings, we found a direct correlation between the amount of parking available and asking rents, with tenants on average paying double the rent for the buildings with the best parking ratios, compared with those with the least parking,” said Mr Hoddell.