The office space market in Kenya has been under pressure for some years now (since 2017) due to increasing supply levels year on and low demand for the same. Office supply has been higher than the demand uptake creating an oversupply and putting pressure on occupancy levels and rent rates. However, key prime office space has continued to do well compared to other grades due to the limited offer of such in the wider market. This trend is likely to continue in the medium term. The number of prime occupiers has expanded or upgraded premises, resulting in steady demand for Grade A office space, especially in key office nodes. Trends such as co-working have continued to have an impact on the local office market.
In 2020, the office sector recorded an average rental yield of 7.0% and an occupancy rate of 78%, lower than the 8% and 80% recorded in 2019, respectively. This was attributed to reduced demand for office space due to the COVID-19 pandemic as businesses closed down, scaled-down operations while others opted to work from home leading to reduced demand for physical office spaces.
Office node such as Gigiri was one of the best performers in 2020 recording a rental yield of 9%, higher than the average rental yield of 7% within the Nairobi Metropolitan Area. The strong performance of this node is attributed to the availability of high-quality office spaces charging premium rental prices, relatively good infrastructure with the area being served with Limuru Road, and the relatively low supply of space within the submarket.
Mombasa Road was the worst-performing area recording a 5% average rental yield, lower than the 6% recorded in 2019, attributed to the low asking price of KES 73 per sq. ft which is lower than the market average asking rent of KES 93 per sq. ft, traffic congestion and, zoning regulations as Mombasa road is mainly an industrial area thus making it unattractive to business firms.
The immediate future of the office sector in Nairobi is not promising due to the reduced demand for office spaces as businesses close down, scale down operations and opt to work from home as they continue to grapple with the Covid-19 effects. The asking prices and rents are expected to decline as landlords continue giving discounts and concessions to attract and retain clients.
The office sector may record improvement performance in 2021 as organizations become more resilient and find new ways to remain afloat in pandemic times. However, the sector will continue to experience constraints such as oversupply of office space and subdued demand for space. Co-working spaces are likely to gain more traction in the coming years.