Landlords offer rent cut, concessions as office market dips on slowing economy

Within the second half of 2022, landlords or suppliers of prime office spaces were cautiously optimistic about the market returning to the same level of activities recorded before the global Covid-19 pandemic, but that did not happen.

The landlords, therefore, had to take actions that enabled them to retain existing tenants and attract new ones. Those actions included rent reductions and offers of concessions and incentives such as flexible leases and rent-free periods which were not normal market practices.

Events in the market during the period under review were clear reflections of the poor state of the economy which has struggled through an unprecedented rise in inflation, slowing economic activities arising from high-interest rate, exchange rate volatility and cash scarcity.

The total stock of office space in the market remained stagnant at 175,272 square metres in the second half of that year as there was no single office building that was completed within the period.

About 126,134 square metres space were under construction; only 387 square metres were leased out to professional services providers who were the top occupiers, while total vacancy rate in that period was as high as 24 percent.

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Broll Properties in its recent report on the office market in the second half of 2022, said that the market saw a dip of 19 percent in new leases signed within that period. According to the report, Victoria Island in Lagos continued to drive the market by recording 54 percent of the total leases signed within that period while Ikoyi, also in Lagos, recorded 46 percent.

It was a tenant’s market, according to the report, as the tenant’s preferences were the major drivers of market transactions. “It was a race among the landlords who could best provide these preferences and would have the advantage of attracting more tenants. Although these are not typical market practices, we are in a dynamic and peculiar market that has evolved,” said Chun Gwom, senior research analyst, at Broll Nigeria.

Gwom noted that the pandemic introduced non-traditional practices which were forcing modern-day practices such as hybrid systems and sustainable practices, adding that they observed the emphasis tenants placed on flexible leases, accessibility, a safe environment, and security at top of their priorities when considering acquiring a space.

“A flexible lease gives the tenants the option to opt out of a long-term lease. Traditional leases range from 5 years and more. However, tenants are looking at shorter leases where they can easily adjust their current requirements based on performance preference change,” he said.

Continuing, he said, “In terms of flexibility, occupiers are seeking co-working and hot-desking solutions that significantly reduce their take-on costs and set-up period, as a way to manage workplace set-up for the short to medium term.”

Space suppliers have more dull moments to contend with going forward as a tenants’ preference survey conducted by Broll, shows an estimated 41 percent of tenants saying that their space requirements over the next six months will remain unchanged.

“The office market will continue to offer some optimism in its recovery leaving tenants and landlords with hard decisions when considering rent increases in space requirements,” Gwom said.

The market, however, has an outlook that is promising, especially in the areas of demand and supply. This is because current market fundamentals show there is a strong possibility of sustained demand over the next six months. This expectation, according to Gwom, is driven by factors such as strong economic growth, favourable regulatory policies, and positive business sentiment.

These factors, he added, were expected to create a conducive environment for businesses to expand and invest in premium office spaces, which will drive the demand for prime and grade-A office properties.

In terms of supply, he said, based on current market trends and the delivery of Famfa Tower, it is expected that there will be a significant increase in the office supply in the next six months.

“This can be attributed to the expected increase in demand for office products and supplies resulting from the expansion of businesses and growth in the economy,” he said.

“The arrival of Famfa Tower is likely to contribute to this growth as it will provide businesses with the necessary resources to expand their operations and increase their productivity, leading to an increase in the demand for office supplies.”