More worries for prime office investors as co-work gains traction, conversion persists
As though the receding demand, rents fall and stiff competition in the market are not enough concerns, prime office space investors and developers are now up again a new wave of competition thrown up by promoters of co-working or work-place destinations which are fast gaining traction in Nigeria.
This sub-market has also seen a good number of residential buildings converted to commercial office space. Some corporate organizations and individuals, pressed hard by the economic headwinds, have converted part of their residences into offices to save cost, thus shrinking demand for new office space.
Co-working spaces have become a major phenomenon pushing down the upfront cost small and medium sized companies need to spend on space. A new report on the performance of real estate in Nigeria in the first six months of this year notes that the co-working sub-market has grown so big, increasing by 21 percent to 41, up from 34 within the last six months in Lagos alone.
Also known as virtual office, co-work or work-place destination has come to stay in Nigerian property market with very encouraging outlook. A couple of years ago, the growth of the virtual office was negligible and almost a source of worry for the operators, but as years went by, demand began to increase and became quite visible in April 2016.
“Organizations are downsizing and many are relocate to virtual offices to manage costs. Lots of new businesses with plans to enter the Nigerian market will also dip their toe into the water by starting off in a virtual office with one or two representatives within the country”, says Emeka Eleh, former president of the Nigerian Institution of Estate Surveyors and Valuers (NIESV).
Eleh hopes that demand will continue to rise as tenants want to run lean but efficient offices, projecting that within this year and beyond, the lessons of the economic recession and uncertainties of the economy will drive demand for virtual offices, particularly in the big cities of Lagos, Abuja and Port Harcourt.
Among the real estate sub-markets, the commercial office space appears to have received more shocks from the negative economic headwinds. But this is understandable. Corporate users of this real estate product are cutting costs and have, therefore, become unwilling to take up new or expensive space due to recession. The volatile foreign exchange market has been another undoing for this sub-market where rents are charged in dollars.
There has been an over-supply to the market, leading to significant drop in rents in the major cities of the country. While Garki 11 in Abuja is leading the pack in rent drop, Yaba which has become the Indian Silicon Valley in Lagos, is leading office rents increase at 67 percent.
In Abuja Central Business District, rents dropped from N80/$0.28 in 2016 to N57/$0.17 in 2017, representing -29 percent drop; Garki 11 was N25/$0.09 in 2016, but dropped to N21/$0.06 in 2017, giving a 30 percent decline. In Port Harcourt, office space was rent on Olu Obasanjo Way at N20,000/$0.07 per month, but dropped 20 percent to N16,000/$0.04 per month in 2017.
In Lagos, whereas there was a rent increase of 67 percent in Yaba from N15,000/$0.04 in 2016 to N25,000/$0.07 as at June 2017, there was a significant drop in Lagos Island where tenants enjoy a 25 percent drop from N28,000/$0.08 in 2016 to N21,000/$0.06 per month.
This sub-market has continued to see increased supply, but at a slower rate. Analysts however observe that forces of demand and supply would subsequently force not only rents to go down, but several other terms and payment structures have to be relaxed and rejigged in the face of a slowly recovering economy.
“The significant slowdown in activity and high vacancy rates recorded in previous quarters, pushed estate agents and property owners to extend even more concessions to prospective tenants, flexible modes of payment and other incentives such as fit-out allowances, which are attractive to tenants deterred by the large capital expenditure needed to furnish space”, Eleh disclosed.
Similarly, Tayo Odunsi, CEO, Northcourt Real Estate, noted in the real estate market performance report as at June this year that within the period, “landlords in prime locations were willing to accept quarterly payments, giving moratoria of up to six months for very large spaces to attract certain tenants; some were also willing to accept rent in arrears and offered to pay the transaction fees on behalf of the tenant in a bid to reduce the barriers to entry”.
Odunsi whose company conducted the report noted further that occupiers in Grade B buildings seized the opportunity of reduced rents/rent conditions to move into A-grade buildings, stressing that “this trend is expected to continue as market conditions are not recovering fast enough to encourage otherwise”.
“The decline in prime office space rent may not end soon as approximately 30,000 square metres of grade-A space is expected to join the jostle for occupiers before the close of 2017 in the form of Alliance Place which was projected to be delivered by Q2, 2017, Madina Towers,Q3, 2017 and Kingsway Tower, Q4, 2017 among others”, he added.
CHUKA UROKO