The commercial real estate, particularly office space, market has once again relapsed into slow motion after a brief interlude of rebound from the crippling impact of COVID-19 pandemic.
This segment of the real estate market is passing through a difficult time as many office buildings are now recording increases in vacancy rates as organisations adjust to adverse economic conditions occasioned by rising inflation, and petrol price hike among others.
While some organisations, still smarting from the impact of the pandemic, are continuing with flexible work schedule, many more others are adopting work-from-home (WFH) and hybrid work models to stave off rising operation cost and transportation cost for their staff members.
For that reason, many of these organisations are reducing their space requirements, and that is affecting demand for office space and, by extension, increasing existing vacancy rates in office buildings.
Post-pandemic, activities within commercial real estate had been significantly subdued such that most of the pipeline office building projects have had their delivery dates reviewed. Though there was a recovery in terms of enquiries in the second half of last year, those enquiries did not translate to actual deals.
A recent report on the market notes that the traditional demand drivers in this market have shifted downwards, while transaction volumes and sizes have continued to decline. In highbrow locations like Ikoyi and Victoria Island, asking rents for grade A office space were $700 and $630 respectively, down from $1,000 and $850 in the previous years.
According to the report, the situation in the office space market is such that in 2022, there was no new project that was initiated in Lagos, which is home to this segment of the market, being the commercial nerve centre of Nigeria.
The recent fuel subsidy removal that pushed petrol price up from N185 to N500, N550 and N600 per litre, depending on location, has had far-reaching social and economic consequences for both households and businesses.
For an economy that runs chiefly on generators with about 40 percent of businesses including small and medium enterprises operating on generators, this means increased energy cost that has made many start-ups and entrepreneurs embrace remote work as the new normal.
Specifically, the skyrocketing fuel prices are wreaking havoc on the construction and building industry, driving up the nation’s inflation rate, worsening the supply chain crisis, and increasing the cost of doing business. It has also necessitated an increase in service charges, especially electricity tariff in the commercial real estate market.
Before now, it was a fad among organisations to have their offices in imposing and large office buildings with their staff operating within such buildings. That fad is fading away fast and, according to Omorinsola Shonubi, a real estate consultant, “it is because an increasing number of people turn away from the traditional model of commuting every day into offices in Nigeria’s city centres.”
Shonubi noted that the development has further created an increased vacancy rate in the commercial real estate sector and put pressure on some landlords of commercial offices to cut down rents in order to retain tenants. In both the mainland and island areas of Lagos, there are many vacant luxury office spaces.
He said that work from home was the way to go in the present circumstance, pointing out that it has the advantage of reducing the cost of maintaining offices. He added, however, that the adoption of work from home would reduce demand for commercial offices and increase the number of voids in the commercial property segment.
Another advantage of WFH is that facility management of office buildings will drop when people work from home two or three days per week, the cost of running generators with diesel, service charge will drop and instead of using bigger generators to power a complex, smaller generators can be used since there are fewer people coming to the office.
“Before the fuel subsidy removal, there has been a drop in demand for commercial space. When the economy is not doing well, people hardly rent offices because there are no contracts; inflation is over 23 percent, foreign exchange rate is high and multifaceted issues are facing the economy. We have not had it so bad in recent times,” he said.
Read also: Vacancy rate drops 24% in Nigeria’s prime office space market
The downside of this development, Shonubi said, was that it would lead to reduced investment in office spaces, adding that those who might invest were called ‘casual investors’ who would not study the market because they have access to free money and base their decision on strategic location of property and assume that people would rent such spaces.
A business owner who did not want to be named, agreed, adding however that work from home could only be effective if the company is able to provide the necessary facilities for their workers to perform optimally and there is an efficient monitoring mechanism.
“Yes, organisations should adopt a flexible working model but that also comes at a cost; they should be able to provide the necessary facilities for them to work at home. Otherwise, it is just a license for many of them to idle away unless there is effective monitoring or measurement and evaluation,” he said.
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