Landlords enticing office tenants with creative lease deals

A creative approach to leasing deals is helping innovative landlords overcome the challenges of high unoccupied office spaces in an overstocked Nairobi market. 

This is according to Broll Property Intel’s latest Kenya Office Market Snapshot H1 2019 report. The study says landlords are finally beginning to accept softer rentals and lease terms to secure good quality tenants. 

So far, landlords are willing to consider innovative occupational terms such as the acceptance of revenue share rent (where the landlord and tenant share revenue) as opposed to the typical rental based on space. 

They are also considering extended fit-out periods beyond the standard three months, tenant installation contribution and progressive increase of rates instead of the usually fixed rate of approximately 7.5 per cent per annum for Kenya shilling denominated rent or five per cent per annum for US dollar denominated rent. 

Rent deposit

Some landlords are now also accepting security deposits of a combination of two months’ rent as a bank guarantee and one month’s rent in cash unlike the traditional three months’ rent cash security deposit.

“Office market remains strongly tenant driven and because of these landlords are now offering innovative occupational terms in order to attract demand since office supply is higher than the demand,” says Vivian Ombwayo, Broll Kenya’s Head of Research and Valuations.

As a result of increasingly attractive leasing terms offered, grade A office space registered the highest year-on-year occupancy growth of more than 27 per cent from 65 per cent in the first half of 2018 to 83 per cent in the corresponding period in 2019. Grade B office space grew at a rate of nine per cent during the same period, recording an occupancy growth rate of 88 per cent in the first half (H1) 2019.

The increase in occupancy levels can also be attributed to increased interests from new entrants coupled with tenants who are realising their expansion plans, particularly in the manufacturing, pharmaceutical and electronics sectors. Innovative landlords are also helping to drive the market by offering flexible occupational terms and commercial concessions. 

“Grade A buildings are top quality, modern properties, that are generally pace-setters in establishing rentals and the latest building services. They offer ample parking, prestigious lobbies and other selling points such as having a view and being located in a desirable address,” says the report.

Nairobi’s existing supply of grade A office space measures approximately 961,000 square metres (sqm) while grade B space accounts for roughly 976,000SQM. Business districts of Westland’s, Upper Hill and Kilimani contain the largest combined grades office market share. This is followed by the Central Business District. 

In terms of grade A office space, Westland’s holds the largest market supply followed by Upper Hill and Kilimani. Riverside, Gigiri and Karen, being affluent neighbourhoods, offer predominantly grade A office space, but are smaller nodes in nature. With regards to grade B space, Upper Hill has the largest supply followed by Kilimani and the CBD.

Office market outlook

While economic growth brings an associated increased demand, there still remains a significant amount of grade A office space available for tenants to choose from in the market. In such a competitive environment, landlords are recognising that they need to offer attractive terms; while corporates with professional representation are realising the choice and power they have at the negotiating table.

“The outlook for the Nairobi office market is expected to remain balanced in favour of the tenant while the overhang of supply is gradually taken up. Office space supply is anticipated to stabilise over the next six months, which is likely to eventually, translate to improved occupancy across the major nodes,” says the report.