Industry News

Nairobi Office Market Slows as Investors Hang Back

Companies are shelving their plans to take additional office spaces.

Updated on

October 26, 2023

Developers in Nairobi are pulling back from office construction as companies cut their office space demand amid a cocktail of challenges and new business realities.

The global economic slowdown, staff lay-offs, and remote working have impacted the uptake of office space in the city as companies seek ways to cut their costs, according to a report by real estate consultant Knight Frank.

“It has been observed that some companies are shelving their plans to take additional spaces in favour of remote working and co-working, as a way to cut their recurrent expenses,” Knight Frank said in its H1 2023 Kenya Market Update.

The rising cost of capital, coupled with developers’ struggles to service their loans, has led financial institutions to adopt a conservative approach to funding large real estate projects, resulting in subdued office construction activities.

As a result, the pipeline supply for 2023 remains subdued compared to previous years, with very few office developments expected to be completed this year.

“This may largely be due to the historic oversupply the office sector is experiencing, making investors wary of heavily putting their money into this real estate class,” the report says.

In 2022, for example, 600,000 sq. ft. of grade A office space was introduced into the market, adding to a glut that continues to impact the office market negatively.

This has caused prime office rents to stagnate at $1.20 (about Sh180 at current exchange rates) per square foot, per month, down from $1.40 (about Sh210) five years ago.

During the period under review, occupancy levels in Nairobi fell 3.9% to 71.5%. The decline is attributed to additional grade A office space that was injected last year, combined with the non-renewal of some leases.

While some companies, still smarting from the crippling impact of the Covid-19 pandemic, are continuing with flexible work schedules, many others are adopting work-from-home and hybrid work models to reduce their operative costs.

For that reason, many of these companies are reducing their space requirements, which is lowering the demand for office space and, by extension, increasing existing vacancy rates in office buildings.