Increased supply of commercial office space in Nairobi is constraining the performance of the sector in East Africa’s largest city, according to a report Cytonn Investments.
According to the report released on Monday , there is a supply of 6.3mn square feet against a demand of 3.1mn sqft of office space in Nairobi, resulting in softening of the performance of the office market with occupancy and prices declining by 1% and 6% points, respectively, while rents and yields remained unchanged from 2015.
“The commercial office sector is softening after exponential growth in the past five years. This is as there was increased supply with completions increasing with a 46% CAGR between 2013 and 2016 alone”, the report said.
Nairobi is staring at an oversupply of 3.2 mn sqft of office space in 2017 and it is expected to grow by 21% to 3.9 mn sqft in 2018.
Returns in the office market remained unchanged in 2016, with average rental yields of 9.3% at an average occupancy rate of 88% over the period, while occupancy rates have declined from 91% in 2011 to average at 88% in 2016.
Nairobi’s commercial office space is expected to grow at an even slower rate in 2017 and 2018 as the market responds to increasing vacancy rates due to falling demand. The drop in demand is attributed to harsh investment climate that has seen multi-national firms uch as HSBC and Atlas Development exit the country.
Despite the oversupply in the sector, demand for grade A offices remains high, as very few buildings in Nairobi meet the threshold. Grade B offices remain the most popular in the market at an average occupancy rate of 90.7% compared to 85.7% and 87.5% for grades A and C, respectively.
The report also shows that Upperhill, CBD and Westlands have the largest office space supply with a market share of 24.4%, 24.3% and 23.7%, respectively of the total office space supply in Nairobi. Upperhill, Westlands and Kilimani have recorded a rapid growth in office space recently as firms move away from the CBD in search of better quality space.