By Stephen Osomba

Trouble has been brewing in the commercial real estate sector globally for some time. In Kenya, notable headlines have covered the sale of Thika Road Mall (TRM) and Waterfront Mall in Karen, Nairobi. Empty malls and vacant office buildings are now a common sight in Nairobi and other major urban areas. The signs were evident, yet many dismissed them as temporary issues. We will revisit this later, but first, let's take a walk down memory lane.

Some History

Commercial property development in Kenya started slowly, like many ventures requiring significant effort. When former President Mwai Kibaki took office in 2003 and initiated aggressive economic transformation, the trajectory shifted upward. The economic revival led to the rise of stronger blue-chip companies and a surge in micro, small, and medium enterprises (MSMEs). Multinational companies also flocked to Kenya to capitalize on new opportunities. This resulted in a sharp increase in demand for commercial spaces, both retail and office, a stark contrast to the previously subdued market appetite. Under Kibaki's visionary policies, the country was hopeful. In 2003, Kenya was ranked the most hopeful and happiest nation worldwide according to the World Happiness Index. Optimistic property investors responded by constructing commercial buildings to accommodate the expanding and new businesses. Thus, a real estate frenzy began.

The Boom & Doom

Demand surged, and prime commercial plots in urban centers were quickly acquired. In Nairobi's Upper Hill and Westlands business districts, construction was rampant. Developers enjoyed a renaissance in the sector after years of stagnation. The renewed enthusiasm was welcome, as many commercial spaces had become dilapidated. However, all good things must come to an end. In typical fashion, Kenyans quickly adopted successful business concepts without always considering market fundamentals and changing conditions. This expansion cycle led to an oversupply of commercial spaces, outpacing demand. Despite this, prices did not decrease, and many spaces remained empty.

Space Surplus

According to the Nairobi Metropolitan Area Commercial Office Report 2020 by Cytonn Real Estate, in 2019, the area saw a supply of 6.7 million square feet against a demand of 0.3 million square feet, resulting in an oversupply of 6.3 million square feet. Rental yields gradually declined. The same report noted a 0.7% decline in average rental yields to 7.7% in 2019 from 8.3% in 2018. Occupancy rates fell by 3.3% to 80.5% in 2019 from 83.8% in 2018. Despite these signs, construction of commercial spaces continues unabated.

Emerging Trends

As the oversupply persisted, COVID-19 struck, providing an opportunity for reflection. The pandemic brought significant challenges and new trends that threaten the commercial real estate sector: a rise in e-commerce and remote working. More people are embracing online shopping and visiting physical stores less frequently. Companies are adopting policies that allow employees to work from home, reducing the need for office space. This trend is likely to remain a permanent feature in labor engagement.

Final Thoughts

In light of these developments, is the commercial real estate sector in Kenya facing a downturn? While it's unclear if the sector is entirely dead, evidence suggests reduced business activity. The current oversupply of office spaces may not be needed. Real estate players should prepare for reduced earnings, affecting investors, agents, and property managers. We may see more consolidation of workspaces and an increase in co-working spaces, especially among SMEs. Overall, the sector may change in unforeseen ways. It's crucial to stay alert to disruptions and adapt accordingly.