Oversupply and economic challenges stagnate office rental growth in African markets

By NBM Writer

The African office market faces challenges from oversupply, changing work patterns, and unfavourable economic conditions. These factors have contributed to prolonged vacancy rates, decreased sales of office space, and a notable decline in rental returns. For example, in the Nairobi Metropolitan Area, an excess supply of office space of over 8mn sqft surpasses the current demand. Consequently, developers have put a hold on new construction projects until the “extra” office space in the market is absorbed. 

The office occupancy levels in Nairobi have also experienced a decline of 3.9%, dropping to 71.5% from the 74.9% recorded in 2022. This decrease can be attributed to over 600,000 sqft of grade A office space coming onto the market in 2022 and a number of notable leases that were not renewed. Consequently, this decline has also affected the returns received by landlords, which currently stand at 8.5%. The increased supply is primarily in the Westlands office district in Nairobi, which continues to be the most sought-after office location, particularly for multinational corporations. 

Reduced occupancy levels can also be attributed to certain companies adopting remote working and co-working spaces to mitigate recurring costs. This trend reflects the prevailing global pattern, wherein major multinational corporations are contemplating reducing their office space by approximately 10 to 20 percent in the foreseeable future. This is according to our Global survey, – (Y)OUR SPACE –, which gathered insights from over 350 companies across the world.

A similar situation is experienced in Botswana, where the office market growth has experienced poor performance since the third quarter of (Q3) 2022, majorly due to an increase in office supply resulting from completed construction projects such as the Botswana Unified Revenue Service Building and the Innovation Hub Building. According to the Bank of Botswana Monetary Policy Report, office supply is expected to increase further due to ongoing construction projects and planned office buildings in the Central Business District (CBD), including those by the Botswana Housing and Water Utilities Corporations. This additional supply will exert downward pressure on rental prices, particularly in decentralized office locations. The rental rates for prime offices have remained steady at Sh1,494.60 ($10.60) psm per month.

Another example is South Africa, where the office market faces significant challenges due to oversupply. The outlook for this market is further worsened by a poor economic forecast and the rising trend of remote working, with hybrid work models significantly gaining popularity. The electricity crisis has also reduced the economic prospects and demand for office space. 

As long as there is an overall surplus of office space, rental growth will remain severely affected, although, office demand is forecasted to grow once the country achieves sustained economic growth of 3% or higher, along with improved unemployment levels.

Overall, the oversupply of office space has caused landlords and property managers to reduce rents and offer incentives to attract tenants. The transition to remote work arrangements has significantly impacted the commercial real estate sector in other ways, encompassing design, construction, and furnishings. This trend has been further amplified by organizations’ need to address net-zero objectives and achieve their Environmental, Social, and Governance (ESG) criteria. 

Therefore, in spite of a general oversupply of office space on the continent, there has been a surge in demand for offices that achieve new ESG standards, against limited availability of such space across Africa. Developers of new space, therefore, must ensure that their product ticks all the right boxes in order to attract tenants in this increasingly demanding sector of the property market.     

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