Parklands and Karen have the Highest Returns on Commercial Office Sector

Parklands and Karen have the highest returns on Commercial Office Sector with average rental yields of 9.7 percent and 9.5 percent, respectively with Mombasa Rd and Thika Road having the lowest returns with average rental yields of 8.5 percent for each.

The Central Business District (CBD), Upperhill and Westlands, on the other hand, have the largest supply, with market shares of 18.0 Percent, 17.9 percent, and 17.5 percent, respectively with a cumulative market share of 53.4 Percent.

Gigiri and Thika Road were said to have the lowest supply with a market share of the total office space of 1.0 percent and 0.6 percent, respectively

This is according to the Cytonn Investments Weekly Report themed ‘The Nairobi Commercial Office Report’ that noted that Upperhill, Westlands, and Kilimani have grown as business nodes as firms move away from the CBD in search of better quality space and hence the high supply

Oversupply continues to constrain the commercial office theme with rental yields and occupancy declining, buyers will thus have bargaining power as developers struggle to fill up office spaces.

The report stated that the commercial office space theme softened in 2017 as a result of oversupply, occupancy rates and rental yields declined by 4.8 percent and 0.1 percent points, respectively to average at 83.2 percent and 9.2 percent, respectively.

This was attributed to  an increase in supply, with the market having an oversupply of 4.7mn SQFT in 2017, and an expected oversupply of 5.3 million SQFT in 2018, and Reduced demand for office space in the market due to a tough operating environment characterized by political uncertainty and low credit supply as a result of the implementation of the Banking Amendment Act, 2015 thus a slowdown in business that typically drive the commercial office market in Kenya such as financial institutions, SME’s, NGO’s and the Government.

Serviced offices, green buildings, and high rise buildings are some of the key trends that characterized the commercial office theme in Nairobi in 2017 according to the report.

The supply of office space was on an upward trajectory between 2012 and 2016 with completions increasing with a 52.5 percent CAGR over this time and a 5-year CAGR of 23.6 percent between 2012 and 2017.

This was driven by demand from multinationals setting up operations in the country such as Google and General Electric as well as a growing economy supporting the growth of SMEs

The increased supply resulted in an oversupply which was 4.7mn SQFT in 2017 and thus a market correction, with completions declining by 46.3 percent between 2016 and 2017 from 6.5millionn SQFT to average at 3.5mn SQFT

Over the next two years, office space completion is expected to decline with a 2-year CAGR of 1.3 percent.