March 18th 2024
FOR IMMEDIATE RELEASE
“WESTLANDS WAS THE BEST PERFORMING COMMERCIAL OFFICE NODE IN THE NAIROBI METROPOLITAN AREA WITH AVERAGE RENTAL YIELDS OF 8.5, 0.8% POINTS HIGHER THAN THE MARKET AVERAGE OF 7.7%”
Cytonn Real Estate, the development affiliate of Cytonn Investments, has released their Nairobi Metropolitan Area Commercial Office Report-2024. The report analyses the performance of the commercial office sector in the Nairobi Metropolitan Area (NMA) through tracking the changes in occupancies, rental yields and rental rates. It also outlines the commercial office space demand, supply, opportunities and outlook of the sector.
- Nairobi Metropolitan Area (NMA) Commercial Office Submarket Performance 2023
The Commercial Office sector realized a 0.1%-points increase in average rental yields in 2023 to 7.7%, from 7.6% recorded in 2022 attributable to increased occupancy and rental rates. Average asking rents per SQFT in the Nairobi Metropolitan Area (NMA) increased by 7.1% to Kshs 103 per SQFT from Kshs 96 per SQFT in 2022. Additionally, occupancy rates increased by 0.9%-points to 80.3% from 79.4% achieved in 2022. The sector's improved performance can be attributed to various factors, including: i) the gradual resurgence of demand for physical spaces as more firms resumed full operations, ii) increased availability of high-quality Grade A office spaces, exemplified by The Piano, The Cube, Karen Green, Principal Place, iii) expansion and entry strategies strategies adopted by multi-national and international companies bolstering occupancy rates, and iv) a more stable and favourable business environment post-COVID-19. The table below shows the Nairobi Metropolitan Area (NMA) sub-market performance;
|
(All values in Kshs unless stated otherwise) |
|||||||||||
|
Cytonn Report: Nairobi Metropolitan Area Commercial Office Market Performance FY’2023 |
|||||||||||
|
Area |
Price/SQFT FY 2022 |
Rent/SQFT FY 2022 |
Occupancy FY 2022(%) |
Rental Yields FY 2022(%) |
Price Kshs/ SQFT FY 2023 |
Rent Kshs/ SQFT FY 2023 |
Occupancy FY 2023(%) |
Rental Yield FY 2023(%) |
∆ in Rent
|
∆ in Occup ancy
|
∆ in Rental Yields |
|
Westlands |
12,032 |
108 |
75.7% |
8.3% |
12,504 |
120 |
75.1% |
8.5% |
11.1% |
(0.6%) |
0.2% |
|
Gigiri |
13,500 |
118 |
81.0% |
8.7% |
15,000 |
128 |
79.8% |
8.2% |
8.5% |
(1.2%) |
(0.5%) |
|
Parklands |
11,662 |
91 |
81.0% |
7.7% |
11,875 |
92 |
85.8% |
8.0% |
1.0% |
4.8% |
0.3% |
|
Kilimani |
12,260 |
92 |
80.8% |
7.7% |
13,051 |
102 |
83.6% |
7.9% |
11.0% |
2.8% |
0.3% |
|
Karen |
13,431 |
111 |
83.0% |
8.3% |
14,246 |
115 |
80.1% |
7.8% |
4.2% |
(2.9%) |
(0.4%) |
|
Nairobi CBD |
11,971 |
83 |
84.4% |
7.3% |
12,000 |
90 |
85.0% |
7.6% |
7.4% |
0.6% |
0.3% |
|
Upperhill |
12,605 |
97 |
75.0% |
7.1% |
13,086 |
100 |
75.2% |
6.8% |
3.1% |
0.2% |
(0.3%) |
|
Thika Road |
12,571 |
79 |
77.9% |
6.0% |
12,571 |
79 |
79.4% |
6.0% |
0.0% |
1.6% |
(0.1%) |
|
Mombasa Road |
11,325 |
71 |
65.5% |
5.1% |
11,325 |
72 |
74.5% |
5.7% |
0.7% |
9.0% |
0.6% |
|
Average |
12,223 |
94 |
79.4% |
7.6% |
12,673 |
103 |
80.3% |
7.7% |
7.1% |
0.9% |
0.1% |
Source: Cytonn Research
Key take-outs from the table above include;
- In FY’2023, Westlands emerged as the top-performing node, boasting an average rental yield of 8.5%, surpassing the market average of 7.7% by 0.8% points. Gigiri followed closely as the second-best performing node, achieving an average rental yield of 8.2%. Karen secured the third position with an average rental yield of 8.0%. The high demand for premium office spaces and the attractiveness of investment opportunities in these areas can be attributed to several key factors: i) these nodes boast a significant concentration of top-quality office buildings that command premium rental rates and yields, ii) landlords in these areas tend to favor collecting rent in dollars, enhancing the investment appeal, iii) the presence of ample infrastructure and amenities adds value to investments in these locations, and iv) the prominence of multinational corporations, international organizations, and embassies in these areas drives up the demand for quality office spaces, and,
- On the contrary, Mombasa Road emerged as the least performing node in FY’2023, recording an average rental yield of 5.7%, which was 2.0%-points lower than the market average of 7.7%. Several factors contributed to this underperformance: i) the prevalence of lower quality office buildings in this area results in lower average rental rates, averaging at Kshs 72 per SQFT, ii) its predominant reputation and recognition as an industrial zone, which diminishes its appeal to office-based businesses seeking commercial spaces, and, iii) stiff competition from other sub-markets further exacerbates the challenges faced by the zone in attracting tenants and achieving higher rental yields.
- NMA Serviced Office and Grade Performances 2023
In terms of performance;
- Grade A and Grade B office spaces achieved the highest rental yields, both reaching 7.8%. The strong performance of Grade B offices can be attributed to their growing popularity among tenants, as evidenced by a 0.6% increase in occupancy rates. This rise is mainly due to their comparatively affordable rental rates compared to Grade A offices, which experienced a 2.5% decrease in occupancy rates. Additionally, Grade B offices offer superior technical services compared to Grade C spaces. However, Grade C office spaces demonstrated the most significant improvement in occupancy rates, increasing by 3.8% in 2023,
- Grade A offices saw the most substantial Year-on-Year (y/y) rise in rental rates, increasing by 12.6% in 2023 to Kshs 119 per SQFT from Kshs 104 per SQFT in 2022. This surge is credited to; i) the premium quality of Grade A spaces, which command higher rents, ii) heightened demand from multinational corporations and organizations, and iii) the preference amongst landlords of prime commercial offices to collect rent in dollars against the depreciation of the Kenyan Shilling during the year,
- Grade B offices saw no change in average rental yields, which can be attributed to the stable demand for these spaces coupled with competitive rental rates compared to Grade A and C office spaces. However, there was a 0.6% increase in average occupancy rates attributable to the flexibility and affordability of Grade B offices, making them a preferred choice for tenants seeking quality office space within a reasonable budget, and,
- Grade C offices experienced the most significant rise in rental yield, increasing by 0.4%. This notable improvement can be credited to a substantial increase in occupancy rates, which surged by 3.8% from 73.2% in 2022 to 77.0% in 2023 due to their affordability.
In 2023, serviced offices experienced a 5.9% year-on-year (y/y) growth in rental revenues, with average rental rates rising to Kshs 199 per SQFT, up from Kshs 190 per SQFT in 2022. In contrast, unserviced offices saw a revenue increase of 5.4%, with average rental rates climbing to Kshs 103 per SQFT in 2023, compared to Kshs 94 per SQFT in 2022. Notably, serviced offices in Karen and Kilimani recorded the most substantial rent hikes of 8.5% and 8.4% respectively. The improved performance in these areas can be attributed to several factors: i) the presence of quality infrastructure, enhancing accessibility, ii) increased demand for serviced offices driven by a high-end clientele and international firms with evolving preferences, iii) diverse themes and sophisticated designs demanding top-tier standards, and, iv) high-quality facilities attracting premium rents, often in dollars.
- Recommendation and Outlook
Key: Green – POSITIVE, Grey – NEUTRAL, Red – NEGATIVE; highlights sectorial outlook
|
Cytonn Report: Nairobi Metropolitan Area (NMA) Commercial Office Outlook |
||||
|
Measure |
2022 Sentiment |
2023 Sentiment and 2024 Outlook |
2023 Review |
2024 Outlook |
|
Supply |
The sector recorded an oversupply of 5.8 mn SQFT of office space in 2022, a 13.4% decrease from the 6.7 mn SQFT realized in 2021 in NMA. This was due to increased demand for office spaces which in turn increased the occupancy rates by 1.8% points to 79.4% in 2022 from 77.6% in 2021 at the back of continuous recovery of economy in post-COVID-19 period. This is as most corporate organizations and businesses reverted to full operations and use of physical spaces. The incoming supply in 2022 came at 0.6 mn SQFT 20.0% higher than the 0.5 mn SQFT recorded in 2021 |
The oversupply of commercial office space remained unchanged at approximately 5.8 mn SQFT in 2023. Escalating construction costs and increasing debt servicing costs on the back of a depreciation currency, dissuaded developers from initiating new projects or expanding existing ones, thus limiting the influx of additional office space into the market. Despite the persistent oversupply, there was a notable decline in the average office vacancy rate, decreasing from 20.6% in 2022 to 19.7% in 2023. This decline was attributed to the gradual recovery in demand for office space following the impact of the COVID-19 pandemic in 2020. Consequently, the improved demand led to faster absorption rates of both new and existing developments throughout 2023, even with the introduction of 0.1 mn SQFT of office space into the market—an 83.3% reduction from the 0.6 mn SQFT supplied in 2022 In 2024, we expect the office space oversupply to increase by 19.0% to 6.9 mn SQFT in 2024 from 5.8 mn SQFT in 2023 due to an increase in incoming supply However, we expect rising construction costs, elevated credit risk and relatively higher debt servicing costs on the back of continued currency depreciation will impact on the optimal supply of newer office developments by developers subsequently limiting incoming new supply. |
Neutral |
Neutral |
|
Demand |
There was an increased demand for office spaces in the NMA, evidenced by the 1.8% increase in the average occupancy rates which came in at 79.4% in 2022 from 77.6% recorded in 2021. This was mainly attributed to a slow but rising demand for physical space on the back of various firms resuming full operations, coupled with the expansion strategy by various firms such as Call Centre International (CCI) Group and the rising trend in serviced office spaces spearheaded by firms like Nairobi Garage, Kofisi, and Regus. In addition to this, the absorption of office spaces increased by 150.0% to 1.0 mn SQFT in 2022 from 0.4 mn SQFT recorded in 2021 attributed to a further increase of occupation of physical unserviced and serviced spaces at the back of full operations of businesses and organisations |
In 2023, there was an increased demand for office spaces in the NMA, evidenced by the 0.9% increase in the average occupancy rates which came in at 80.3% in 2023 from 79.4% recorded in 2022. This was mainly attributed to i) the gradual resurgence of demand for physical spaces as more firms resumed full operations, increased availability of high-quality Grade A office spaces, exemplified by The Piano, The Cube, Karen Green, Principal Place, iii) expansion and entry strategies adopted by multi-national and international companies bolstering occupancy rates, and iv) a more stable and favourable business environment post-COVID-19. Notably, office space uptake reduced by 10.0% to reach 0.9 mn SQFT in 2023, down from the 1.0 mn SQFT registered in 2022. This decrease is credited to lingering uncertainties in the economic environment, and cautious decision-making by businesses amidst a challenging micro-economic environment necessitating operational costs reduction. As a result, a significant number of businesses and organizations have downsized their office spaces accommodating flexible work arrangements such as remote working and co-working spaces. We expect the occupancy rates to contract by 1.1%-points to 79.2% from 80.3% in 2023 mainly attributed to the persisting uncertainties in the economic landscape, continued adoption of remote work policies by companies, and an oversupply of 6.9 mn SQFT of office spaces in 2024. These factors are likely to hinder absorption rates, potentially leading to a decrease in occupancy rates |
Positive |
Negative |
|
Office Market Performance |
The average rental yield improved by 0.3% points to 7.6% in FY’2022 from 7.3% recorded in FY’2021, due to improved occupancy and rental rates. Average asking rents per SQFT in the NMA increased by 2.1% to Kshs 96 per SQFT from Kshs 94, owing to an increased supply of Grade A offices fetching higher rents such as Karen Green and Global Trade Centre (GTC) Office Tower, among others. The overall occupancy rates increased by 1.8% points to 79.4% from 77.6% as a result of slow but rising demand for physical space on the back of various firms resuming full operations, coupled with the expansion strategy by various firms such as Nairobi Garage and Call Centre International (CCI) Group |
The average rental yield improved by 0.1% points to 7.7% in FY’2023 from 7.6% recorded in FY’2022, due to improved occupancy and rental rates. Average asking rents per SQFT in the NMA increased by 7.1% to Kshs 103 per SQFT from Kshs 96, owing to increased availability of high-quality Grade A office spaces, exemplified by The Piano, The Cube, Karen Green, Principal Place. The overall occupancy rates increased by 0.9% points to 80.3% from 79.4% as a result of slow but rising demand for physical space on the back of various firms resuming full operations, coupled with expansion and entry strategies adopted by multi-national and international companies We anticipate a modest increase by 0.2% to 7.9% in rental yields for the sector in 2024, driven by several factors; i) the growing popularity of serviced office spaces is expected to contribute positively to this trend, and, ii) growing preference for landlords to collect rent in dollars. While the sector's expansion may be gradual, it is steadily progressing, supported by the ongoing recovery of the economy towards pre-COVID-19 levels. As a result, we foresee an improvement in asking rents, which will ultimately enhance average rental yields. However, the projected oversupply of office spaces, estimated at 6.9 mn SQFT in the Nairobi Metropolitan Area, is expected to exert downward pressure on the sector's overall performance by dampening demand for physical space thus affecting occupancy rates |
Neutral |
Neutral |
|
We expect a NEUTRAL performance in 2024 unchanged from 2023. The sector's stability will primarily stem from the widespread return to full operational capacity among firms and businesses, driven by improvements in the economy and an increase in the number of start-ups as well as increased entry of international brands, organizations and companies. Furthermore, we anticipate an uptick in the adoption of serviced office spaces, which could enhance occupancy rates as more companies like Regus and Kofisi enter the market. The expansion of serviced spaces has spurred innovation and diversification in the use of vacant areas, including the development of niche-centreed office spaces tailored to specific genders, professions, mindsets, or shared interests of clients. However, the persistent oversupply of office spaces, totaling 6.9 mn SQFT, is projected to continue exerting downward pressure on overall occupancy rates and yields in the sector. Despite this challenge, investment opportunities remain promising in areas such as Westlands, Gigiri and Parklands, and which continue to record high returns at 8.5%, 8.2%, and, 8.0%, respectively, compared to the market average of 7.7% as of FY’2023. |
||||
Source: Cytonn Research
For the detailed report, see the link;
Notes to the Editor:
Cytonn Investments is an independent investment management firm, with offices in Nairobi - Kenya and D.C. Metro - U.S. We are primarily focused on offering alternative investment solutions to individual high net-worth investors, global and institutional investors and Kenyans in the diaspora interested in the high-growth East-African region. We currently have over Kshs 82.0 bn of investments and projects under mandate, primarily in real estate.
Cytonn Real Estate is Cytonn’s development affiliate, which is focused on developing institutional-grade real estate targeted at specific institutional, high net-worth and Diaspora investors. Collective, Cytonn Investments, and Cytonn Real Estate manage over Kshs 82.0 bn in Real Estate projects.
For more information, kindly contact:
Lee M. Gitau
Digital Media
+254 (724) 442 004
Email: lmgitau@cytonn.com
Cytonn Investments Management Limited, Cysuites Workspaces, Church Rd, Westlands, P.O. Box 52878-00200, Nairobi, Kenya.
communications@cytonn.com | +254709 101 000
