Office Absorption Increases By 64% Despite Covid-19

Prime residential rents declined at a slower rate of 6.02 percent over the past 12 months to June, compared to a 7.62 percent decline in a comparable period in 2020 according to Knight Frank’s 1st Half 2021 Kenya Market Update.

This change was mainly attributed to the reopening of the economy, roll out of vaccinations, and landlords adjusting rental terms to accept lower rental prices.

The continued oversupply of residential developments in certain locations such as Kilimani coupled with the current economic state still makes this sector a buyers’ and tenants’ market.

Prime residential sale prices in Nairobi marginally improved by 0.1 percent over the past 12 months to June 2021, compared to a 5.1 percent decline in a comparable period in 2020 providing signs the market is stabilizing.

This is mainly attributed to a realization amongst sellers that prices have adjusted and encouraging signs of buyers resuming their investment plans which were halted last year due to the pandemic.

Ben Woodhams, Knight Frank Kenya MD said: “There has been a notable increase in market activity in the 1^st half of 2021 and we expect prime residential sale prices and rental rates to gradually improve in the second half of 2021 due to the increased flexibility from landlords and sellers, projected positive economic growth and containment of the virus.”

In the office market, a similar trend is evident with prime office rents decreasing marginally in the 1^st half of 2021 from US$1.12 (KES 121) to US$1.10 (KES 119) per sq. ft per month.

The most significant and positive data is the absorption of Grade A and B office space increase by 64% in the review period compared to the second half of 2020.

This dramatic increase was mainly attributed to the roll-out of vaccinations globally providing occupiers with confidence to resume looking at their occupational strategies, evidenced further by the gradual physical return of employees to their offices.

In addition, we have seen a reduced supply of new office developments resulting in occupiers taking up space in existing commercial buildings and landlords becoming more flexible by reducing their rental terms. Similar to 2020, average occupancy rates across commercial buildings over the review period were at circa 73%.

Anthony Havelock, Head of Agency said: “Although the pandemic is still having an ongoing impact on working practices and the occupation of offices, there are increasing signs of both employers and their employees adapting to new flexible working patterns and a weariness to virtual meetings hence a desire to return to the formal workplace in a responsible manner.

This reinforces the need for physical offices where collaboration and brand awareness are paramount and has been demonstrated by the increase in take-up and active requirements now in the market.

The higher take-up and demand offices in the 1^st half of 2021 was due to an improving global economic outlook and both local and international occupiers taking the opportunity to  upgrade from their older accommodation  to modern Grade A offices taking advantage of the reduced headline rents and tenants incentives that are currently available, we refer to this as a “flight to quality.”

The ongoing pandemic and economic headwinds continued to adversely affect the retail sector as prime retail rents decreased from US$ 4.2 (KES 456) to US$ 4.00 (KES 434) per sq. ft per month over the review period. The marginal decline was mainly attributed to the economic slowdown, reversal of various tax reprieves in January 2021 resulting in less disposable incomes, and re-introduction of containment measures in March 2021. Although once again the rate of the decline has eased.

Similar to 2020, occupancy levels for retail centers averaged 70-80 percent, although more established malls recorded higher occupancy levels of up to 90 percent.

Grocery retailing remained one of the most active segments in the retail sector. Leading local and international supermarket operators continued to battle for market share dominance, through expansion and capitalizing on the void left by outgoing or struggling retailers.

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