Office market records worst performance in 5yrs with 45% vacancy rate

Prime office segment of the Nigerian real estate market recorded its worst performance in five years with vacancy rate remaining unchanged as at the second half of 2021, a new market report has shown.

The report describes 2021 generally as the office market’s less than desirable period when the performance of key metrics such as take-up was at its lowest.

Activity, within the period, remained significantly subdued and, though there was a strong recovery in enquiries in the second half of the year, these did not translate to actual deals concluded. In Ikoyi and Victoria Island, for instance, asking rents for grade A office space were $700 and $630 respectively, down from $1,000 and $850 respectively about three years ago.

All these are, however, understandable or expected in the sector still smarting from the crippling impact of Covid-19 pandemic with its frequent lockdowns, physical and social distancing rules that compelled many organizations to adopt remote working, leaving behind large office spaces.

The situation in office space sharply contrasts that of the residential segment of the market where Bismarck Rewane says prices and sales value in leading cities for land and residential apartments have risen, noting that the retail market is experiencing market corrections due to climbing demand from local investors.

Rewane in his February breakfast meeting at the Lagos Business School, projected the global value of real estate sector to grow to $85.1 trillion in 2025 from $34 trillion in 2021, pointing out that core cities such as Lagos will drive the Nigerian investment landscape.

Though retail and hospitality sub-sectors were equally hard-hit along with office space by the pandemic, in terms of recovery, office is lagging. Retail particularly has recovered significantly, riding on food investment.

Broll Property Services, which compiled the new report, looking at the second half of 2021,notes that not only did the traditional drivers of demand in the office market shift, transaction volumes and sizes continued to decline.

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However, Amaka Ajaegbu, Broll’s research manager Nigeria says “the high specification buildings in the market are doing relatively well, given the existing realities, with a number of landlords securing near 100 percent renewals of existing leases, albeit at more competitive terms in some cases.

According to her, the additional leases totaling 1000 square metres that were recorded during the period under review were driven by co-working, fintech and financial services companies.

“There was a slight recovery in occupancy levels, however, many corporates continued to adhere to COVID-19 work policies,” Ajaegbu noted.

She noted further that, though take-up enquiries improved notably in the period under review, these enquiries failed to move take-up rates, adding that new leases signed within the period H2:2021 was recorded at an estimated 1,079m², bringing total take-up in 2021 to 1,790 square metres.

This shows a decline of about 78 percent relative to take-up recorded in 2020. Lease renewals in the period were generally successful, with a majority of leases renewed upon expiry in the period.

Dolapo Omidire, CEO, Estate Intel, had in an earlier report, said that while absorption levels remained low for prime offices which recorded vacancy levels ranging between 12 percent and 36 percent for Grade A and B offices, developers remained bullish on the market with over 600,000 square meters of space under development.

The Broll report corroborates this view but with a much lower number of pipeline projects. “About 156,000 square metres of space is expected for delivery in the next two years, with 70 percent of that pipeline anticipated for delivery in 2022.

Assessing the investment nature of expected stock, about 64 percent of the pipeline is speculative,” Ajaegbu stated.

She noted that the current pipeline of buildings has put many landlords on edge. There is a significant concentration of pipeline projects on the Alfred Rewane strip in Ikoyi, home to developments such as Heritage Place, Kings Tower and Alliance Place, Kingsway Tower, Famfa Oil Tower among others.

The likes of Dangote and BUA are building their head/regional offices on that strip with Famfa Tower also nearing completion in the location. In Victoria Island, developments such as the TGLS HQ Crystal Tower, Trinity Tower and the Azuri constitute some of the pipeline in the location.

An assessment of tenant preferences relative to the impact of the COVID-19 pandemic shows that, on the average, security, building amenities and location are the top three influences that drive demand in the market.

“About 25 percent of occupiers are looking to cut down space in the future while over 30 percent will leave their requirements unchanged in the foreseeable future. When assessing the future of work, about 43 percent of occupiers are uncertain about the future of work,” Ajaegbu revealed.