Absorption of Grade A and B office space increased by 64 per cent in the first half of 2021 compared to the second half of 2020, a new report has revealed.

The Knight Frank’s First Half 2021 Kenya Market Update report, shows that this dramatic increase was mainly attributed to the roll-out of Covid-19 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.

The increase has also been attributed to reduced supply of new office developments resulting in occupiers taking up space in existing commercial buildings and landlords becoming more flexible on rental terms.

“Though absorption of office space increased in the first half of 2021 (January-June), office rents continued to decline further.

Over the review period, prime commercial office rents decreased marginally from Sh122.27 (US$ 1.12) to Sh120.09 (US$ 1.10) per square feet per month,” reads part of the report.

According to Knight Frank Kenya head of agency Anthony Havelock, the higher take up and demand for offices in the first half of 2021 was also 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.

They were taking advantage of the reduced headline rents and tenants incentives that are available currently, refered to as a “flight to quality”.

“Although the pandemic is still having an on-going 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,” he says.

Offices still important

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 report indicates that, despite the new normal working environment where more employees are working remotely, physical offices will still be important for organisations post-pandemic as demonstrated by the increase in uptake.

Despite the positive response by the market, the report reveals that, average occupancy rates across commercial buildings over the review period was similar to 2020 at approximately 73 per cent.

In 2020, due to the global economic crisis and the pandemic, majority of local and international organisations opted to put their office space requirements on hold to focus on business operations. 

“The good news is that there has been a notable increase in corporate activity, with Knight Frank recording up to approximately 500,000 square feet worth of live enquiries from potential occupiers by the end of the review period,” said Anthony, adding, “This is a positive indication that the prime office market is slowly recovering.”

On the residential segment, prime residential rents according to the report continued to decline though at a slower rate of 6.02 per cent over the past one year to June 2021, compared to a 7.62 per cent decline in a comparable period in 2020.

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.

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

Stabilising residential market

Contrary to the declining rental yields, prime residential sale prices in Nairobi marginally improved by 0.1 per cent over the past one year, compared to a 5.1 per cent decline in a comparable period in 2020 providing signs the market is stabilising.

The increase has been realised, because developers and sellers are now becoming more flexible with negotiations and are willing to accept lower prices.

Buyers are also resuming their investment plans, which were halted last year due to the pandemic.

 “We expect prime residential sale prices and rental rates to gradually improve in the second half of 2021 due to the increasing flexibility from landlords and sellers, projected positive economic growth and containment of the virus,” said Ben Woodhams, Knight Frank Kenya managing director.

For the retail sector, the ongoing pandemic and economic headwind continued to adversely affect the retail sector as prime retail rents decreased from Sh456 (US$ 4.2) to Sh434 (US$ 4.00) per square feet 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.

 Similar to 2020, occupancy levels for retail centres averaged 70 to 80 per cent, although more established malls recorded higher occupancy levels of up to 90 per cent.

Grocery retailing remained one of the most active segments in the retail sector. “

The retail market continues to be a tenants’ market although the second half of 2021 projects a positive outlook for this sector.

Positively, one sector of the market that we are witnessing significant interest is smaller convenience centres,” says Ashmi Shah, Kight Frank Kenya retail portfolio manager.