Prime office space suppliers are not having it easy as they struggle to retain occupancy and seek strategies to get new tenants. Transaction activity, particularly new leases, dropped in the first half of 2021 to the worst levels the market has recorded since the 2016 recession.
Only 191 square metres were signed in a single transaction within the period, representing a 86 percent decline in the new leases signed in H2:2020. Overall, leasing activity was driven by renewals.
Citing two prime office buildings in Lagos, The Wings Towers on Ozumba Mbadiew Street in Victoria Island and Heritage Place on Kingsway Road in Ikoyi, Gbenga Olaniyan, CEO, Estate Links, confirms to BusinessDay that Covid-19 has really impacted A-Grade office rentals.
In 2015, he explains, The Wings Towers was renting for $1,000 per square metre. Pre-Covid, it was on the market for $800 per square metre. But in July 2021, the rent dropped further to $600 per square metre. The story is the same for Heritage Place.
Within the period under review, both asking and achieved rentals were falling as the nature of transaction activity was limited and hence tenant-friendly.
Broll notes that the market is yet to bottom out as more corporate organisations continue to reevaluate and aspire to optimise their operations in this very challenging economic and business environment.
“Market fundamentals have remained largely unchanged. Landlords continue to seek aggressive strategies to retain occupancy as vacancy levels gradually increase in some buildings,” Bolaji Edu, Broll Nigeria’s CEO, notes.
According to Edu, “On the tenant side, although we observe some resilience among space occupiers, market exit and space downsizing endure.”
Edu gave a highlight of activities in the A-Grade office market as 117,000sqm total stock, 0sqm completions, 90.09sqm under construction, 191sqm gross take-up, 46 percent total vacancy, professional services being top occupiers while landlords remain price takers.
He adds that vacancy levels have dropped in Ikoyi to 24 percent, but high in Victoria Island at 67 percent following notable exits.
Understandably, limited demand is coming from the tech sector, which used to be a major source of demand for office space. The unintended consequences of Twitter ban are taking a toll on the office market.
“The office sector is also enduring challenges from a restrictive policy and regulatory environment. The tech sector has been a major driver of activity in this market, with over 50 percent of new leases signed in 2019 being attributed to the sector,” Edun explains.
Continuing, he states, “The impact of the Twitter ban illustrates a disconnect between the current policy and effective strategies for economic and business progress. Over-regulation in this market, among other factors, could negatively impact the investment potential of Africa’s largest economy.”
Meanwhile, landlords have continued to manage the effects of an ongoing down market that is yet to bottom out. Favourable lease negotiations continue to characterise the market, and despite this, there were limited new leases signed in the period.
The period also saw a number of landlords re-start discussions from existing tenants looking to optimise their space occupancy requirements and costs following current business and economic challenges.
These discussions are still ongoing and although some tenants have been successful in renegotiating their leases in the period, the magnitude effects of further lease renegotiation on landlord’s cash-flows remains a major concern for them.
“We also observed, in the period, that a number of enquiries circulating in the market were ‘dummy’ enquiries as existing tenants at prime grade buildings were utilising offers sourced to renegotiate their current leases for more favourable terms,” the Broll CEO reveals.
Outlook for this segment of the market in the next six months is not altogether dim. On the demand side, it is expected that there will be some demand activity in the coming months.
This would be derived from the state of ongoing transactions in the market and expectations for a slight rekindling of interests that had gone on hold prior to the coronavirus pandemic. But, with more corporates looking to optimise, effectively leading to space reductions, the effects of this is likely to outweigh the former.
On the supply side, the market expects about 90,000sqm to be delivered in the next six to 36 months. This pipeline continues to be a cause for concern for existing landlords due to higher competition for limited demand and its impact on rents and landlord cash flows.
The good news however is that following this, there will be tenant-friendly leases in the short to medium term. But this will depend on future workplace policies as well as macro and policy factors such as currency and GDP growth performance.
Rents remain dicey. “While asking rents are likely to remain unchanged in the coming months, we expect further decline in achievable rents with as high as 20-30 percent disparity between these rental values and initial rental offers,” Edu states.
Source: Business Day