Knight Frank sees ease in office space supply as demand cools

Rental prices for office spaces may soften in the near future as landlords grapple with empty spaces due to an oversupply and reduced demand, a new report shows. 

The insistence of tenants to pay their leases in Kenya shillings despite US dollar-denominated loans by landlords is also said to affect the security of their investments.

The latest Knight Frank market update for the half year ended December 2024 while noting that remote work gained momentum during the period in review, says there is still demand for office spaces as Kenyan employers are inclined to employees showing up physically. 

As such, there are still more office spaces coming up even as the real estate consultant foresees fewer developers investing in the same. This is coupled with a challenging economic environment, which the report shows slightly reduced demand for office space.

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Knight Frank states that while studies have shown that employee productivity is largely unaffected by work location, many companies opted for an in-office work arrangement.

“This was driven by factors such as justifying office space costs, direct supervision, and fostering in-person collaboration,” says the firm. 

The firm notes a measured approach to the supply of office spaces in the market. 

“Kenya’s office market has historically experienced oversupply. This reality seems to be catching up with the sector, with Knight Frank Kenya noting a decline in future office space supply,” reads the report. 

Knight Frank cites Purple Tower along Mombasa Road, Highway Heights in Kilimani, Matrix One, the Mandrake, and Museum Hill Towers in Westlands as some of the office spaces added into the market during the period, collectively adding at least 522,284 square feet of prime office space.

The report notes a challenging economic environment slightly reduced the uptake of prime offices in the period. 

Additionally, the released new stock caused downward pressure on occupancy levels, with average occupancy rates falling from 77.2 per cent in the first half of 2024 to 72.70 per cent in the second half of the year. 

“Occupancy rates in Kenya have historically varied around a long-term average of 75 per cent (+/- three per cent). This stability is consistent with monthly prime office rents which remain at USD 1.2 per sq ft exclusive of taxes,” says the real estate consultant. 

It adds that currency volatility is significantly impacting the Kenyan real estate market, particularly for developers with US dollar-denominated loans. 

Knight Frank says while landlords seek to hedge against foreign exchange losses by preferring dollar-denominated leases, tenant resistance, often due to most of their operations being in Kenya shillings, limits the success of this strategy. 

“Since Kenya is a tenant’s market, many landlords are compelled to continue accepting Kenyan shilling-denominated leases to maintain occupancy rates,” the firm explains. 

These trends, and the recent cost-saving proposal by the National Treasury to have State agencies rent cheaper premises, co-share or build their own premises, are expected to further affect the influx of office spaces and consequently the rent prices. 

The 2025 draft Budget Policy Statement notes high leasing costs, stating that government agencies have hired offices in high-end areas such as Upperhill, a prime office space location synonymous with financial services firms.

In the statement, the National Treasury proposes a one-stop shop for all government agencies. “The Public Relations and International Relations sector has prioritised construction of offices as opposed to hiring including foreign missions. This is indicated in the report presented to the public,” says Treasury. 

The recent merger of some State agencies and withdrawal of funding from the Exchequer for others may also have an impact on the supply and prices of office spaces.