Companies are increasingly shunning office space in Nairobi due to landlords' preference for tenants paying rent in dollars, the latest Kenya Market Update by Knight Frank shows.
According to the report, office occupancy in the first half of 2023 recorded a decline of 3.9 percent, settling at 71.5 percent, in comparison to the preceding half-year period.
The trend was also attributed to the oversupply of office space in the capital and the growing popularity of remote working among Kenyans.
Notably, the reduced uptake happened even as office rent prices remained stagnant at Ksh175 (USD1.2) per square foot.
Per the report, this shift in demand for dollars by landlords is driven by the continued devaluation of the Kenyan Shilling in relation to the US dollar, which exposes landlords to foreign exchange losses.
Landlords' insistence on rent payment in dollars primarily benefits those with dollar-based earnings, while those earning in Kenyan shillings are adversely affected by the weakening shilling.
"This needs is also to align revenue and cost currencies as most commercials debt is dollar-denominated," read part of the report.
Another factor contributing to the decline in office occupancy is the oversupply of office space within the city.
In 2022 alone, the introduction of 600,000 square feet of grade-A office spaces exacerbated this situation.
Grade-A offices are the highest quality offices and are typically newly constructed and equipped with the latest and quality infrastructure, making them highly sought after by corporates and large businesses.
Further, the oversupply has been compounded by some companies opting not to renew their leases, resulting in an increased number of unoccupied office space in the city.
In the wake of the pandemic, many companies have also embraced remote working as a long-term strategy, which further diminishes the demand for physical office space and contributes to the overall decline in office occupancy.
"It has been observed that some companies are shelving their plans to take additional spaces in favour of remote working and co-working, a way to cut their recurrent expense," read part of the report.
"The fall in occupancies is in tandem with an 18.72 per cent drop in absorption rates in H1, 2023, from H2, 2022," the report read in part.
Knight Frank also noted that companies are displaying reluctance in supporting real estate developers, primarily due to the rising cost of capital.
This hesitation stems from concerns that developers may encounter difficulties in repaying loans or even face the possibility of failure.
Additionally, the report highlighted that only a limited number of offices currently under development are anticipated to reach completion during the review period.
