Office space: Investors count losses as 'To Let' signs spread in prime estates

But now the vacancy crisis raises a critical question: What is driving businesses away, and what does this mean for landlords, some of whom had converted residential spaces into offices and the future of commercial real estate in Nairobi’s residential neighbourhoods?

Julius Mwaura, an engineer and a property owner in Nairobi, shares his frustrations: “I invested heavily in converting my rental apartments into office spaces in 2018 because there was high demand.

For a while, I had no vacant units. But since 2021, it has been a nightmare. I slashed rent by 30 percent to attract tenants, but even that hasn’t worked. Some tenants left without notice, and now I’m stuck with empty spaces that aren’t generating income.

"Due to the tough economic times, I have even started subdividing my own office in Nairobi’s CBD so I can sublet, since the luxury of owning an office to just relax and meet my clients is gone. I’d better meet them in hotels over a cup of coffee."

Mr Mwaura’s case is not unique. Many landlords are grappling with empty offices, yet they still have to service loans, pay maintenance costs, and meet land rates. Some have resorted to repurposing their buildings into residential spaces again, while others have opted to offer flexible leasing terms.

According to Faith Peris Wambui, a real estate consultant in Nairobi, the office space problem in estates is partly due to oversupply.

"For years, landlords rushed to build office spaces without properly studying market trends. The assumption was that businesses would always need physical spaces, but the post-pandemic reality has changed that. With more people working remotely and co-working spaces gaining popularity, traditional office setups are losing relevance, especially in estates,” she explains.

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Ms Wambui suggests that landlords must rethink their strategies, possibly by converting office spaces into shared working spaces, short-term rental units, or even storage facilities to match evolving needs.

The latest Knight Frank market update for the second half of 2024 reveals that the average occupancy rate fell from 77.2 percent in the first half of 2024 to 72.7 percent, marking a significant decline as new office spaces entered the market.

During the review period, at least 522,284 square feet of prime office space was added to Nairobi’s market, including properties such as Purple Tower along Mombasa Road, Highway Heights in Kilimani, Matrix One, the Mandrake and Museum Hill Towers in Westlands.

This influx of new stock put downward pressure on rental prices and occupancy levels.

For business owners, the decision to move out of estate offices is primarily financial. Martin Karanja, who ran a small accounting firm in Nairobi's Kilimani estate, explains why he left his office last year: "Our rent was Sh60,000 per month, yet most of our work was being done remotely. Clients preferred virtual meetings, and we realised we could operate without a physical office. Now, we work from home and meet clients in co-working spaces when necessary. It’s cheaper and more flexible," he says.

Many businesses like Mr Karanja’s have discovered that virtual operations reduce overhead costs, making it unnecessary to rent office spaces full-time. This shift has left landlords with more vacancies than tenants.

Edwin Kabugi, an urban designer and tutorial fellow at the Technical University of Kenya, attributes this shift to evolving work dynamics and economic pressures.

“Historically, office spaces were in high demand, making them a lucrative investment. However, the supply of these spaces continues to rise, despite a declining demand,” Mr Kabugi explains. He notes that while the trend began before Covid-19 due to shrinking employment, the pandemic accelerated the shift by normalising remote work and reducing businesses' reliance on physical offices.

Knight Frank’s report shows that Kenya’s office occupancy rates have historically averaged 75 percent (+/- 3 percent), a level that recent trends threaten to disrupt.

Monthly prime office rents remain stable at $1.2 per square foot, excluding taxes. However, developers with US dollar-denominated loans are struggling, as tenants prefer to pay leases in Kenya shillings to avoid currency exchange risks.

According to Mr Kabugi, companies are now evaluating whether a dedicated office is necessary for productivity, efficiency and return on investment.

“Many businesses have realised they can operate remotely without compromising efficiency. Others are downsising or opting for co-working spaces to cut costs,” he says.

The new work models include hybrid arrangements—where businesses use shared office spaces when needed—and full-time remote work, where employees work entirely from home or other non-traditional settings.

Mr Kabugi points out that improved internet access, virtual platforms, and flexible workspaces in hotels and restaurants have made it easier for businesses to function without a fixed office.

He warns that investors in office spaces must adapt to these changing dynamics. “Instead of focusing on traditional office setups, they should consider flexible, shared, and hybrid models that align with modern business needs,” he advises.

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As urban skylines continue to expand, the future of office spaces will depend on how well investors adjust to these evolving trends.

Mr Kabugi adds that if properly structured, some of these office spaces can be repurposed into community hubs, creative workspaces, or even urban farming zones, depending on the location and demand.

As Nairobi’s real estate market undergoes significant shifts, landlords, business owners, and urban planners are being forced to rethink how vacant office spaces in residential estates can be utilised.

Urban planner Mark Mbwika, sheds light on the subject:“One emerging solution is the conversion of these spaces back into residential units. With the city facing a growing demand for housing, some landlords are opting to repurpose office buildings into apartments."

Another approach gaining traction is the establishment of co-working spaces. Given the rise of remote and hybrid work models, businesses and freelancers are increasingly seeking flexible workspaces rather than long-term leases.

By transforming vacant offices into shared work environments, landlords can attract a new segment of tenants while meeting the needs of today’s workforce.

Beyond individual efforts, there is also a need for policy adjustments that promote mixed-use developments. City planners must reconsider zoning laws to allow commercial buildings to serve alternative functions when demand shifts. By integrating flexible usage options, Nairobi’s urban landscape can better adapt to economic and social changes,” says Mr Mbwika.

The Treasury’s 2025 draft Budget Policy Statement also proposes cost-saving measures that could impact the office market. Government agencies have historically leased expensive office spaces in prime locations such as Upper Hill, but Treasury now suggests that State agencies co-share or build their own premises to cut costs.

Additionally, the merger of some State agencies and withdrawal of funding for others could further reduce office space demand.

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