27 February 2014

Kenya: Office Space Supply in Nairobi to Exceed Demand

Office space supply in Nairobi is seen exceeding demand by 2016 owing to the high number of planned new developments, a market survey has forecast.

Mentor Management Ltd, a project management firm owned by private equity fund Actis, in a eight-year market review and forecast (2009-2016) said presently each office node in the city "is behaving differently".

Some locations such as Upper Hill are reaching saturation, it said, while others such as Westlands and Waiyaki Way are experiencing shortage amid rising demand.

"When you go into details, you can tell there is a mismatch between the quantity being supplied and the uptake. We predict that the demand-supply mismatch will persist," said chief executive James Hoddell.

Mombasa Road is already experiencing oversupply hence high vacancy rates, while Upper Hill is on the same brink. Asking rents for 'Grade A' quality of office space on Mombasa Road is about Sh75 per square foot and around Sh62 per square foot for Grade B offices.

"The lower demand on Mombasa Road is a direct consequence of traffic congestion, which has led to high vacancies and depressed rentals," Hoddell said.

Gigiri is emerging as a new office node helped by eased zoning restrictions which have allowed construction of commercial buildings. Asking rents in the node are about Sh140 per square foot, according to Mentor Management.

Office space prices in Westlands are marginally lower than in Upper Hill at about Sh165 per square foot currently for 'Grade A' offices, the firm said. Shortage of office space in Westlands and Waiyaki Way is set to worsen as demand rises faster than new-build.

"Based on current planning permissions and construction underway, shortage will be worse in 2014 and 2015," the firm reported.

Waiyaki Way has attracted big business lately with three of the 'big four' professional services firms - PricewaterhouseCoopers, KPMG and Deloitte - now operating from here.

Barclays Bank moved its head office to The West End building next to Safaricom, while Tullow Oil has taken up spacein the opposite building dubbed West End Towers. Major office buildings on Waiyaki Way include Lion Place which hosts Radio Africa Group, Knight Frank and a banking hall.

Mentor Management predicts that overall there will be excess supply of office space in Nairobi in the next two years.

"New-build across all office nodes may lead to oversupply in all areas by 2016," Hoddell said.

Upper Hill is an "imminent source of oversupply" as current occupancy levels hit 95 per cent amid a "sharp supply increase", the firm said. It estimates that an additional 2.28 million square feet of office space will be offloaded in Upper Hill by 2016.

This could correct the high rental prices as landlords start serious competition for tenants. The survey found that choice of office space is informed by ease of access and adequate parking.

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