The year 2018 was not particularly a good one for Grade A office space landlords who, in spite of all the concessions and incentives they had to give to tenants coupled with creative and innovative ideas they brought into the delivery their products, still had an estimated 300,000 square metres empty space to contend with.
But that is not even the story at the moment. The story rather is that these landlords are likely to struggle more in the new year as the property market will be receiving, in addition to the existing oversupply, about 400,000 square metres space coming from pipeline projects due for delivery by Q4 2019.
What this means is that investment considerations in this space have to be given thorough scrutiny. But patient investors with long term view of the Nigerian market can still take a short, considering that Nigeria has a resilient economy which will begin to boom again when a good leadership with good policy direction is in place.
The country is a trading economy. This, coupled with the fact that the fundamentals that drive demand for office space and, indeed, other segments of the real estate market remain unchanged, are enough impetus for fresh investment.
But at the moment, this market is struggling and owners of existing facilities are under pressure. Besides the economic slowdown, leading to contraction in business and economic activities, prime office market landlords are also grappling with the growing demand for co-working space as a result of growth in start-up industry.
“The supply of co-working spaces is rising to meet up with demand, which continues to increase with the emergence of tech-startups”, Ayo Ibaru confirmed in a recent report by Northcourt Real Estate on real estate outlook for 2019.
Ibaru, who is the company’s chief operating officer, pointed out however that, though vacancy rates for Grade A offices remain high, buildings designed with user-experience as the primary consideration will have lower vacancies, adding that the results of the February and March 2019 elections will determine how much space will be absorbed by the market, especially by the international community.
It was not all tales of woe for this market in 2018. Indeed, there was a gradual improvement in the performance of the office market as a few internationals chose to brave the political uncertainties and open up shop. Ibaru recalls that Tek Experts and Axxela Group took up 2,000 square metres and 1,000 square metres respectively at The Wings Towers in Victoria Island just as the International Finance Corporation (IFC) moved into Alliance Place in Ikoyi, Lagos.
Contractors were commissioned to redevelop the Number One building (formerly known as the IMB Office) in Victoria Island Lagos being redeveloped for leading South Africa-based cable provider – DSTV. Ibaru mooted that the cost of the redevelopment was over N5 billion, adding that Dangote Industries and Famfa towers in Ikoyi continued to make progress on their respective developments.
Grade A office vacancy rates remain high and corporate organisations are in conversations geared towards putting up under-utilised space for co-working use. “Millennials and the startup community continue to drive up demand for co-working spaces with service providers seeking to convince traditional large-scale employers on the benefits of co-working”, Ibaru noted.
A major source of worry for landlords is the significant drop in Grade A office rents which remain around $600 per square metre and $700 per square metre in Victoria Island and Ikoyi respectively. This is coming down from an Olympus height of about $850 per square metres and $1000 per square metres a couple of years ago.
To ease take-up of these facilities, landlords have continued with most of the incentives initiated during the recession, including rent free fit out periods, back-end rent payments and the like. Some of them now accept naira payment on quarterly basis as against annually or multi-year advance payment in dollars.
Ongoing office developments include Africa Towers, World Trade Centre, Corporate Towers (Eko Atlantic) amongst others. Cornerstone’s 12-floor Head Office located in the Lekki axis is nearing completion.
Residential buildings conversions to office use continue to spring up rapidly in areas such as Ikeja GRA and Lekki Phase 1. Recent completions include the 4,000 square metres Desiderata and the 6,956 square metres Alliance Place with the later yet to achieve strong occupancy levels. Location and security remain essential for clients selecting commercial space and a growing insistence for green and sustainability features.
The outlook for this market in 2019 is neither cheering nor promising. Ibaru says high vacancy rates are expected for Grade A offices, at least, until a direction for the economy is determined. “Landlords will need to remain flexible and accommodating of tenants’ preferences to keep vacancy rates manageable”, he advised.
CHUKA UROKO
