Rental stability: Time to move up the ladder to ideal office space

Time is now and opportunity is here for prudent companies to move up the ladder to secure ideal office space this year as both global and local market dynamics will keep prime office rents stable at their current levels, at least,  in the immediate to the medium terms.

With the expected 37,000 square metres new space coming into the market this year, and because no major new entrants (occupiers) are expected into the  market as blue chip and multinational firms will continue their prudent ‘wait and see’ approach to space acquisitions, rental stability is almost given.

It is expected that there will be more relocations to newly built and better managed facilities as the general business environment improves, but a new report on the commercial market outlook for 2018 by International Real Estate Partners (IREP) says such movements may not have appreciable impact.

Annual prime office rents in Victoria Island and Ikoyi in Lagos submarkets are expected to remain around the $600 per square metre and $700 per square metre marks respectively. Erejuwa Gbadebo, IREP chief executive officer, says that given this rental stability, some prudent companies may seize the opportunity to obtain the ideal office space at very reasonable prices.

The market situation poses a challenge to the landlords or space providers who, Gbadebo notes, are faced with the need for product differentiation while trying to maintain profit on their investments.

In addition to rentals, given some of the additional pressures that may negatively affect the real estate market in Lagos (the changes to the Land Use Charge, for example), this  may also be the time to try to entice corporate tenants to take up more formal office spaces.

But this is not going to come cheap because, according to Gbadebo, the landlords have to lure the corporate to  a lifestyle change by including cafés, gyms, crèches and/or a bit of retail, as well as green solutions and power saving features in their offerings.

The IREP boss is optimistic on the economy and, in tandem with expectations of the World Bank, she anticipates a steady and continuous growth of the wider economy.  “2018, being the year preceding national elections, we expect an inflow of funds from the government and a better implementation of the budget in line with provisions for capital expenditure.

“We also expect that government spending will spur other parts of the economy, including real estate, driving down the rates of unemployment and increasing local production”,  she says.

In spite of this optimism and assumptions, the narrative in the retail segment of the market won’t be any different.  Like the office market, no changes are expected in actual retail rentals even though tenants continue to negotiate concessions and rent holidays from landlords.

It is noteworthy, however, that with the adoption of Naira-based leases, many smaller retail centres have increased their uptake from retailers, although these are still contending with the problems of stock purchase and pricing. For those larger malls that are unable to convert their leases to Naira, agreeing a fixed exchange rate, lower than the inter-bank rate, helps to retain good tenants.

Unlike the office market, retail has, from the last quarter of 2017, seen some positive movements such that despite the difficult operating environment, the market is gradually recovering, as evidenced by the increase in footfall in some malls, examples of which include Circle and Novare Malls both in Lekki.

There have been reduced vacancy rates and some increased activity which Gbadebo attributed to new international retailers like the new Japanese retailer, Miniso.

“Without a doubt, the size of the population of Nigeria is every retailer’s dream. While the cinemas and the grocery tenants draw a large portion of the shoppers as anchors, it is observed that the paying customers are desirous of a more exciting retail experience. This is evidenced by the population at the various retail fairs organised from time to time”, she noted.

Continuing, she said, “the task at hand is to ensure that increased footfalls translate into actual sales; landlords and developers will need to invest in intense marketing and promotional activities to ensure that their respective centres remain the preferred retail centres”.

Another segment of the market that is struggling is the industrial. Though the market remains unchanged, there are threats ranging from foreign exchange to import policies,  poor electricity supply and inadequate transportation.

The IREP report points out however that, even though growth in this market has floundered, a slight change in offerings is noticeable as some industrial facilities have gone “off grid” and turned to gas turbines as an alternative power supply for manufacturing plants.

“We anticipate that as more facilities seek alternatives to help improve production, this in turn, should boost the demand and supply of warehouse rentals which, denominated in Naira per square foot, have remained stable. In addition, as the retail and industrial markets are closely linked, we expect that the anticipated growth in retail will cause a corresponding increase in industrial real estate”, Gbadebo said.

CHUKA UROKO