Landlords hit by pressure on prime office rents as occupiers cut back on size

…asking rents decline 10% to $700/sqm in Q4’16

Downward pressure arising from falling rents is to hit providers of prime office space all through 2017 given the expected completion of on-going projects which will intensify competition between them, along with the decision of some occupiers of existing space to cut back on the size of their offices.
The commercial office market has in the last 18 to 24 months been struggling with over-supply of A-grade office space, which worsened in 2016 with 40,400 additional square metres delivered to the Lagos market, with the completion of The Wings Towers in Victoria Island and Lake Point Towers in Ikoyi.
Out of over 100,000 square metres of existing stock, a fourth quarter 2016 report on the prime office market by Broll Nigeria, reveals that only 6,300 square metres of space was leased, of which 4,266 square metres were pre-let agreements and most of these transactions involved relocations from B-grade buildings and serviced office spaces to A-grade buildings in core locations.
“Many corporates have continued to revise their space requirements downwards, in view of prevailing macroeconomic conditions. Supply of A-grade office space increased in fourth quarter of 2016 with the addition of two new developments, The Wings Towers and Lakepoint Towers located in Victoria Island and Ikoyi respectively”, Bolaji Edu, Broll Nigeria’s CEO, noted in the report.
Seyi Madamidola, an estate manager, had confirmed to BusinessDay that office occupiers were really cutting back on the size of their offices, observing that the emptiness created by people moving out of properties was a clear reflection of the state of the economy.
“Offices are shrinking”, he said, disclosing, “we had a tenant who was about to sign for a 2,000 square metres space in a new location, but after one year, they came back to us to ask us to rent out half of the 500 square metre space they had been operating from. This is because they have reduced their operations and what this means is that a number of their staff had had to go”, he said.
He also cited another instance of a company that moved out of a commercial property in Victoria Island into a guest house in Chevron area where it is now using upstairs for offices and downstairs for residential. “By this action, they have cut the cost of office space”, he said.
The challenges in this segment of the market may not be over soon and, according to Edu, over 30,000 square metres of office space is expected to be delivered in the next 12 months, adding to an already over-supplied market and to the downward pressure on rents.
Between the second quarter of 2015 when the present government in the country came in and the first half of 2016, prime office rents dropped by 20 to 25 percent depending on location. In Victoria Island, for instance, rents came down by about 20 percent to $750 to $800 per square metre, down from $1000 to $1,115 per square metre. In Ikoyi, the drop was about 10 to 15 percent to $850 $900 per square metre, down from $1000 to $1,250 per square metre.
As supply continued to increase with new deliveries, Edu observed that, in Victoria Island as a whole, demand has not matched supply, which has been reflected in the 10 percent decline in average asking rents to $700 per square metre, per annum between the third quarter and the fourth quarter of 2016.
Ikoyi, Unlike Victoria Island, recorded a lower take up during the quarter, as only 120 square metres of space was leased in A-grade buildings with other transactions remaining in the negotiation phase.

Bolaji Edu of Broll, however noted that with a growing preference from multinationals, the Ikoyi market is experiencing increased interest, as it establishes itself as the most prime location in the city for corporates.
“With the delivery of two new A-grade options on Alfred Rewane Road (the main commercial core in Ikoyi) during the course of the year, more enquiries are being made by international corporates whose preference for this region is emerging due to ease of access to the mainland, where majority of the working population live, as well as the area’s proximity to expatriate housing in Ikoyi for senior staff”, he said.
A walk through Kingsway Road in Ikoyi, for instance, shows that supply within this node is still on the rise. With the delivery of Lakepoint Towers in Banana Island, 13,400 square metres of space was added to the market. An additional three buildings, including Alliance Place, Kingsway Towers (in advanced stages) and the new NDIC office building, are under construction.
However, similar to Victoria Island, average asking rents in Ikoyi fell by 6 percent to $800 per square metre per annum, in the fourth quarter of 2016.

 

CHUKA UROKO