Kenya's Commercial Real Estate Faces Challenges Amidst Residential Growth

Kenya's commercial real estate market faces ongoing challenges as the value of approved non-residential buildings in Nairobi County remains below pre-pandemic levels.

According to the Kenya National Bureau of Statistics (KNBS), the value of these buildings was Sh31.5 billion in the 11 months ending in November 2023, less than half of the Sh71.5 billion recorded during the same period in 2019. Knight Frank, a property consultancy, notes that few office developments were completed in the past year due to oversupply and investor caution.

The financial institutions' conservative stance, driven by rising capital costs and developers struggling with loan servicing, has subdued activity in the real estate sector. Construction projects approved in Nairobi during the review period increased to Sh163.6 billion, surpassing the Sh128.2 billion approved in 2019, the previous peak. The oversupply issue, present before the pandemic, has been further exacerbated by the challenging economic environment.

Small businesses are opting for smaller spaces, and remote work and co-working are gaining traction among companies looking to reduce costs.
Real estate investment analyst Johnson Denge explains that the pre-existing oversupply issue was intensified by the pandemic, shifting the market toward a lower-end consumer business model, driven by e-commerce and online shopping. Small businesses, grappling with high operating costs and taxes, are downsizing their spaces.

Investors, attracted by the returns from government securities, are choosing to exit riskier asset classes like real estate. Despite decreased demand for commercial properties and retail spaces, many non-residential buildings remain vacant. Prime office rents have remained stable at $1.2 per square foot per month. In the first six months of 2023, several completed projects, including Principal Place, Karen Green, PTA Complex, The Rock, The Piano, and The Cube, contributed to the surge in the housing market. The increase can be attributed, in part, to the approval of more affordable housing options.