A significant amount of the office stock in Nairobi, circa 40%, was developed pre–2010. Most follow old, inefficient building standards offering poor quality workspace, buildings that are poorly maintained, and with very low parking ratios.
Roughly half of these buildings were delivered pre–2000 and are likely to be considered obsolete in the very near future. This will be compounded further by the continuing market oversupply of new office buildings and the adverse effect this is having on rental and vacancy levels overall.
By the end of 2018, the city will have office stock of circa 2.6 million m² comprising institutional quality commercial office space in Nairobi (both Grade A and B). It is interesting to note here that Grade A space is only approximately 15% (400,000 m²) of the total available, due in part to the 2011 to 2015 boom, where demand for prime-located office space was greater than supply. This led to Grade B buildings securing Grade A rentals, primarily due to their location, which in turn prompted significant speculative development of predominantly Grade B office space.
Equilibrium in supply and demand for commercial space was reached in 2015, however, significant bulk was already under construction, which led to oversupply by 2016 and the market-wide vacancies of 11 to 12% that we see in today’s market. It is also interesting to note that more than 50% of that incremental supply in 2016, driven by pre-2015 ‘location demand’, was delivered into Westlands and Upperhill.
Throughout the bull-run, Nairobi’s commercial sector decentralized and new office nodes including Kilimani, Karen, Riverside and Gigiri emerged. Whilst at a headline level there is now significant structural vacancy of circa 12%, it is important to understand what is happening at the nodal level; Upper Hill has the highest vacancy levels at approximately 50% of total vacancy, whereas Westlands and Riverside are at 15% and 7% respectively. The vacancies in Grade A buildings only in Westlands and Riverside are estimated at 8% and 7% respectively, most of this represented by newly completed buildings.
This demonstrates that the bifurcation of Grade A and Grade B product in the market has happened, which is further supported by the vacancy analysis and rental levels. Grade A rents across Nairobi have dropped overall, and are currently at US$1.3-1.5/ft²/month (down from US$1.4-1.6/sqft/month in 2016/17). Grade B building rentals are currently at US$0.8-1.2/ft²/month (down from US$1.3-1.5/sqft/month in 2016/17). As a consequence of this, Grade A occupancies are now significantly higher than Grade B.
Another important factor playing out in Nairobi are nodes with the highest vacancies in the market, with challenging access and congestion, like Mombasa Road, Upperhill and Kilimani, which are the most impacted by the supply cycle dynamics. In the future, Westlands could also become a major congestion concern, in particular offices located close to the new GTC towers.
It is important to put into context that 40% of current stock in Nairobi was built pre-2010 and 50% of that was built pre-2000. As leases come up for renewals, it is expected that these older buildings, often with woefully inadequate parking ratios and inefficient floor plate design, will suffer and lose tenants to the more modern and cost-effective office product.
Nairobi’s oversupply began in 2016 and since then the leasing market has been broadly flat year-on-year.
However, recent research indicates that the supply pipeline (measured as a proportion of approved planning applications) will soon start to decrease and we forecast the annual incremental supply and demand to rebalance over the next two years. The 11 to 12% structural voids will then take a couple of years to move back to a more balanced state, although this could happen more quickly, due to high stratification of quality.
At Garden City Business Park (GCBP), we are constructing the first of four Grade A office buildings, with the first building being delivered in May 2019, entering the market at the start of a ‘recovery’ stage of the cycle. 60% of this building has already been leased to EABL for their new corporate headquarters.
To ensure timely lease up, and given the broad supply dynamics, GCBP offices have been carefully positioned to offer very flexible space at highly competitive rates from US$1.1/ft²/month, reflecting the introduction of a new node. In essence, GCBP is offering Grade A product in Nairobi for prime-node Grade B rentals.
Parking ratios have not been comprised and this is seen as another key distinguishing feature with circa 4 parking bays per 100 m² (among the highest in the city), alongside the benefits of a decentralised node (away from the congested established nodes), and the wider amenity of the shops at Garden City Mall, F&B, leisure, and future medical/hospitality uses, alongside exceptional residential apartments and townhouses available for sale and rent (realizing the anticipated benefits of living and working in a purpose designed and built mixed-use development). The completion of the Outering Road in 2017 has also seen significant improvement in access to exit 6 on Thika Highway to the industrial districts and JKIA airport.
Vacancies in prime-defined nodes and Grade A office product are much lower than market average, showing that there is still a strong demand for quality space such as GCBP. Since 2015, a clear bifurcation in the market has emerged with nodes that were less sought after due to congestion and poor access (Mombasa Road, Ngong Road, Kilimani and Upper Hill) feeling the impact of oversupply the most, and carrying the highest vacancies in the city. As expected, the oversupply has put pressure on rentals across the market but has been particularly acute in the Grade B buildings where the arbitrage to earn Grade A rentals purely based on location ceased to happen.
For office tenants approaching a lease renewal or with a break clause, now is the perfect time to consider your current office costs (rent and service charge), space efficiencies (staff per m² of leasable space) and location against what is available in Nairobi today, and to take stock of the current office market. There are real savings on office costs and overheads to be made if you’re willing to look at the new prime nodes and modern Grade A products available priced with competitive, introductory rates.