Prime office rent drops as SMEs, tech start-ups drive growing demand for co-working spaces
For prime or Grade A office space suppliers, the first half of this year was not time to smile to the banks as rents on their property, instead of going up as expected, saw gradual decline. But those who invested in co-working spaces had reasons to invest more. Even now, the opportunity is compelling.
Slowing economy means gradual decline in economic activities, leading to shrinking consumer purchasing power and a drop in organizations’ income, all leading to low demand for business premises and rising vacancies in existing spaces.
Increased supply amid falling demand leads to a drop in price or rent. Within this period, three office towers—Cornerstone, Greystone and Kingsway brought 12,000 square metres, 11,190 square metres and 13,317 square metres respectively of leasable space to the market. That increased supply further.
Over all, an additional 400,000 square metres of Grade-A office space is expected in 2019 amid rising vacancy rates in the market. Heritage Place, The Wings Complex and Alliance Place have recorded about 55 percent vacancy rate.
Because of this, the use of anchor or off-taker tenants, accessibility, security and green features are, increasingly, being recognised as key drivers to the success of, and demand for prime office buildings.
But while prime office market totters, demand for co-working spaces is growing, showing that the economy is really undergoing a fundamental or paradigm shift in terms of productive potential and what the market wants.
This becomes clearer with the millennial demographic, tech start-ups, women-led enterprises and SMEs identified as leading drivers of demand for co-working spaces.
Space suppliers’ immediate response to this development is the conversion of Grade B offices. Service providers are moving more into the ‘space as a service’ model by upgrading, fitting out and managing Grade B spaces to meet client specifications.
Northcourt Real Estate notes in its recent half-year report says strong occupancy levels in mainland areas like Yaba has only mirrored demand on the Island where spaces in Victoria Island and Lekki are leading the charge, pointing out that the recently launched Delta State Innovation Hub has also increased the demand for co-working in South-Eastern Nigeria.
“To better manage their costs, co-working spaces are opting for management agreements where they introduce their brand to an existing development, splitting site management expenses 75 percent to 25 percent,” said Ayo Ibaru, Director, Real Estate at Northcourt.
Ibaru said that private developers were looking to develop a low- cost co-working 100-man centre in the Alimosho area of Lagos state with a ₦1,000 daily charge, adding that 1—2-man private offices remained the most profitable.
Within this period, Leadspace partnered with First City Monument Bank (FCMB) to open Hub One, a coworking space in Yaba, Lagos. Good news for users of co-working spaces is that Grade A offices are considering partnerships with co-working space providers in which case quality spaces are expected.
Ibaru highlighted some of the features that characterized the market in the period plus the challenges of offering incentives while coughing up funds for maintaining largely vacant multi-storey buildings. This, he said, led to the listing of same for sale.
“The demand for office space is weak in most other states of the country due to the struggling economy,” he said, pointing out that commercial real estate market was going green and transparent.
Part of the good things that are happening in this space is that developers, investors and professionals are more willing than ever before to share transaction details and operate more transparently. Most prime office developments that have been delivered in recent years or expected to come on stream are going green.
Within the space too, there are some projects which have attained energy efficiency certifications and these include Heritage Place, which obtained the LEED Silver certification, and Cornerstone Tower, which is EDGE-certified.
“This consciousness for sustainability is influencing more desirable commercial real estate spaces, reducing costs of occupation while being environmentally friendly,” Ibaru stated.