Corporate tenancy in Lagos is slowing

Now is not the best time to for Class A commercial property in Lagos, more specifically the Lagos Island. About six years ago, a developer/investor building a Class A property for corporate tenants could expect to reach full occupancy within 6-12 months. This is no longer the case in the short to medium term for 2016.

One of the reasons is the sheer number of Class A commercial properties that have become available in the past few months. Whereas in 2010, only approximately five such properties existed, by 2016 20+ Class A properties are expected to arise in Lagos Island releasing an excess capacity of approximately 50,000sqm into the market.

A decrease in prices as such is inevitable, albeit in the short to medium term. Compounding the issue is the market downturn as a result of falling oil prices. Not only are the typically targeted oil companies not able to lease these Class A spaces, but other occupiers (new and existing potential tenants) are sitting in the back burner as well. All are waiting to see what will happen to the Nigerian economy. Government policies, stringent FX restrictions, in addition to the already mentioned falling oil prices, have created an unstable economic environment. This apprehensiveness will likely remain until there is stability in the market. Once this stability is achieved, occupiers will be more decisive and will start making selections from the new and upcoming choices in the market, taking advantage of the supply situation. In the best-case scenario, this can happen by the third quarter of 2016.

Activity is also expected to return as oil prices increase. While the market awaits better conditions, now is the time for owners and investors to start adopting diversification as a strategy. Looking at a location strategy, for instance, there are a large number of these Class A properties being built on the Island whereas the Lagos Mainland still has an unmet demand. Class A commercial properties are in short supply there. How about office sizes? Companies are leaning out their workforce and there is a need for smaller office spaces in general, from 250sqm to 500sqm spaces. Variations in building types as well as asset categories are another diversification play. Class B buildings are in great demand both in the Mainland and Island, and so are other asset categories such as industrial buildings or strip malls. On the occupation front, investors/developers should consider diversifying the potential occupiers that are pitched and expand the focus from targeting multinational companies only to finding local players with longevity. There is basically a need to be innovative to best combat the current conditions of the markets. Players adopting such a strategy can assure their long-term position in the Nigerian real estate market.

CHINWE AJENE-SAGNA
Ajene-Sagna holds an MBA from Harvard
and heads the West Africa office of JLL.