Commercial office sector performance in Kenya softened in 2019 with a 0.7 percent point drop in average rental yields to 7.7 percent, from 8.3 percent in 2018, the Nairobi Metropolitan Area (NMA) Commercial Office Report 2020, released by Cytonn Real Estate- the development affiliate of Cytonn Investments- has revealed.
The drop in rental yields has been attributed to a decline in uptake of office space attributed to a tough financial environment, and an oversupply of 6.3 million square feet which has created a bargaining chip for potential tenants, thus lower rental rates.
The report themed “Supply-Driven Market”, focuses on the performance of the Commercial Office market in the Nairobi Metropolitan Area based on rental yields, occupancy rates, as well as demand and supply, to identify the trends, with the research conducted on 9office nodes in the Nairobi Metropolitan Area (Westlands, Kilimani, Karen, Parklands, Thika Road, Upperhill, Nairobi Central Business District (CBD), Gigiri and Mombasa Road).
Gigiri, Karen and Westlands were the best performers in 2019 recording rental yields of 9.2, 8.3, and 8.3 percent, respectively, attributed to increased demand by businesses and multinational companies due to their proximity to the Central Business District (CBD) and other business nodes, relatively good infrastructure network, their superior locations and availability of quality Grade A offices, enabling them to charge a premium on rentals. According to the report, the investment opportunity within the Nairobi Metropolitan Area is in areas with low supply and high returns such as Gigiri and in differentiated concepts such as mixed-use developments (MUDs) and serviced offices recording rental yields of up to 7.9% and 12.3%, respectively.
“The outlook for the Commercial Office sector is negative given the current office space oversupply and expected stagnation in performance in 2020 given the current Coronavirus pandemic. With the Coronavirus, many corporates have also now tested working from home, and as such, it is unlikely that occupancy levels will recover to the levels they used to be at previously, at least in the medium-term. However, we expect a slowdown in construction activities allowing the existing demand to absorb the current supply,” said Wacu Mbugua, Research Analyst at Cytonn.