View of a section of Westlands, Nairobi. The area recorded the highest average rental yields for MUDs in Nairobi in 2020 according to a report by Cytonn.
View of a section of Westlands, Nairobi.

The Commercial Office sector in the Nairobi Metropolitan Area (NMA)realized an improvement in its overall performance in 2021, with the average rental yields coming in at 7.1 percent, 0.1 percent higher than the 7.0 percent recorded in 2020.

This is according to the Nairobi Metropolitan Area Commercial Office Report-2022 by Cytonn Real Estate, the development affiliate of Cytonn Investments. The report analyses the performance of the commercial office sector in the Nairobi Metropolitan Area (NMA) through tracking the changes in occupancies, rental yields and rental rates. It also outlines the commercial office space demand, supply, opportunities and outlook of the sector.

The average occupancy rates increased by 0.2 percent to 77.9 percent, from 77.7 percent recorded in 2020. The improved performance was largely driven by relaxation of COVID-19 restrictions, positive demographics, and Nairobi’s recognition as a regional hub hence attracting foreign investments.

Gigiri and Westlands were the best performing nodes with average rental yields of 8.6 percent and 8.1 percent, respectively, compared to the market average of 7.1 percengt, in 2021. This was mainly attributed to the presence of high quality offices attracting high rents.

On the other hand, Mombasa Road was the worst performing node with average rental yields of 5.1 percent in 2021, 2.0 percent points lower than the market average of 7.1 percent. This was mainly driven by the low average rents at Ksh73.0 per SQFT compared to the market average of Ksh93 per SQFT, zoning regulations as Mombasa Road is mainly considered an industrial area thus making it unattractive to business firms, and current traffic snarl-ups caused by the ongoing Nairobi Expressway project thus making the area unattractive. However this is a temporary situation as it is expected the area to record improved performance upon the completion of the project.

NMA Serviced Office and Grade Performances

In terms of performance per grade, grade A and B office spaces had the highest rental yields at 7.5 percent as tenants prefer them because of their relative better technical services in comparison to Grade C office spaces. Grade C offices recorded the largest drop in the average rental rates by 3.3 percent which in turn led to the largest drop in rental yields by 0.2 percent points in the period of focus.

Serviced offices realized a 0.8 percent Y/Y rental growth to Ksh183 per SQFT in 2021, from Ksh161 per SQFT recorded in 2020. In comparison to the unserviced offices which recorded average rents of Ksh93, the average rents for the serviced offices were higher by 49.2 percent in 2021. The remarkable performance was mainly attributed to convenience resulting from access to existing facilities, flexibility of the leases, and no set-up costs required.

For 2022, Cytonn’s outlook for the NMA commercial office sector is neutral, from a negative in 2021, mainly due to the full resumption of operations by some firms and businesses amidst the improved economy. However, the remote working model still being embraced by some firms, coupled with existing oversupply of office spaces currently at 6.7 million SQFT are expected to weigh down the overall occupancy rates and yields of the sector.

Investment opportunity lies in Gigiri and Karen supported by relatively low supply of office spaces, and high returns of 8.6 percent and 7.7 percent, respectively, compared to the market average of 7.1 percent, as at 2021.

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