More challenges ahead for prime office market as additional 30,000sqm coming

The prime office market which, in the last 24 months, has been struggling with falling demand and over supply may be facing more challenges this year when over 30,000 square metres space expected to be delivered over the course of the year eventually enter the market, a new report has shown.

The report conducted by Broll Property Services, a subsidiary of Broll South Africa, and obtained by BusinessDay, does not show a cheering outlook for this market as it points out that over 34,000 square metres space is also expected in 2018 with the delivery of Cornerstone Tower by the first quarter 2018.

“Over the course of 2017, four new A-grade buildings are expected to be delivered in Lagos adding over 30,000 of square metres of lettable space to an already oversupplied market”, the report notes, naming on-going buildings set to be completed this year as Alliance Place which will be ready by Q2, 2017; Desiderata Tower, Q3, 2017; Madina Tower, Q3,2017, and Kingsway Tower, Q4,2017.

Nigerian economy has been in recession since the third quarter of 2016 and this has been attributed to the global fall in crude oil prices. This has driven inflation rate to a 7-year high, ending 2016 at 18.55 percent, which was 8.93 percent higher than it started that year. This also exceeded the Central Bank of Nigeria’s (CBN) single digit target range of 6 percent – 9 percent.

But, in spite of the economic downturn, Bolaji Edu, Broll Nigeria’s CEO, points out that Q4,2016 saw a marginal increase in leasing activity as corporate occupiers sought to take advantage of the falling rents and attractive incentives offered by landlords, disclosing that “in this quarter, about 6,300 square metres of space was leased of which 4,266 square metres were pre-let agreements. Most of these transactions involved relocations from B-grade buildings and serviced office spaces to A-grade buildings in core locations.”

Continuing, Edu says many corporates have continued to revise their space requirements downwards in view of the prevailing macroeconomic conditions, but points out that supply of A-grade office space increased in Q4,2016 with the addition of two new developments, The Wings Office Complex and Lakepoint Towers located in Victoria Island and Ikoyi respectively.

Landlords are however taking a hit from all of this as, according to Edu, the addition of these buildings to the existing stock has further added downward pressure to rental levels in Lagos as they strive to remain competitive in the market.

“Amidst the current harsh market realities and rapidly increasing supply, there has been an uptick in demand for smaller sized (100 – 200 square metres) fully furnished spaces from international corporate; additionally, there has also been an increased number of enquiries to purchase office space within newly completed A-grade buildings”, the CEO observes.

This new trend of tenants relocating from B-grade buildings to better quality buildings is envisaged to continue as tenants take advantage of lower rents and favorable incentives and Edu predicts that with various developments in the pipeline, rents are poised to fall further during the year as landlords seek to remain competitive.

Both the core and secondary markets took a bashing in the last quarter of 2016, but whereas there were some level of activities in the core markets of Ikoyi and Victoria Island, Ikeja and Yaba which constitute the secondary market did not record any tangible activity of note.

The completion of The Wings Towers brought additional 27,000 square metres of A-grade space. Before its delivery, The Wings was 50 percent pre-let with Oando as its anchor tenant. Within this period too, there were three new leases signed during the quarter, reflecting a take up of of 1,914 square metres in the region.

“Victoria Island extension (Oniru) also recorded some activity in the development pipeline as the Cornerstone Building, still in the construction phase, experienced notable progress”, Edu says, noting that in Victoria Island as a whole, demand has not matched supply which has been reflected in the 10 percent decline in average asking rents to US$700 per square metre per annum between Q3 and Q4 2016.

Unlike Victoria Island, Ikoyi recorded a lower take up during the quarter as only 120 square metres of space was leased in A-grade buildings with other transactions remaining in the negotiation phase.

However, with a growing preference from multinationals, the Ikoyi sub-region is experiencing increased interest as it establishes itself as the most prime location in the city for corporates. With the delivery of two new A-grade options on Alfred Rewane (the main commercial core in Ikoyi) during the course of the year, more enquiries are being made by international corporates whose preference for this region is emerging due to ease of access to the mainland, where majority of the working population live, as well as the area’s proximity to expatriate housing in Ikoyi for senior staff.

A walk through Kingsway Road, for instance, shows that supply within this node is still on the rise. With the delivery of Lakepoint Towers in Banana Island, 13,400 square matres of space was added to the market. An additional three buildings including Alliance Place, Kingsway Towers (in advanced stages) and the new NDIC office building, are under construction.

Similar to Victoria Island, average asking rents in Ikoyi fell by 6 percent to US$800 per square metres per annum in the fourth quarter of 2016.

CHUKA UROKO