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How corporate tenants shun Lagos high-rise office spaces amid harsh economy

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  • One of the consequences of rapid urbanisation of Lagos State is the consistent rise in the prices of real estate. With over 20 million people squeezed inside its 1,171 km², coupled with an aggressive surge of industrialisation, the resulting increase in demand amid finite supply of landed property has made acquisition of real estate in the state an exclusive preserve of the wealthy. This, perhaps, explains why Lagos has effortlessly recorded significant developments in several parts of the state. Long before its creation by Decree No. 14 of 1967, which restructured Nigeria’s Federation into 12 states, Eko, a long-time pseudonym of Nigeria’s Centre of Excellence, had positioned itself as a trade hub and one of Africa’s most boisterous cities. This was captured in the hit track “Eko O Gba Gbere” by the veteran highlife musician, Pa Chris Ajilo, released in 1968.

One of the consequences of rapid urbanisation of Lagos State is the consistent rise in the prices of real estate. With over 20 million people squeezed inside its 1,171 km², coupled with an aggressive surge of industrialisation, the resulting increase in demand amid finite supply of landed property has made acquisition of real estate in the state an exclusive preserve of the wealthy.

This, perhaps, explains why Lagos has effortlessly recorded significant developments in several parts of the state.

Long before its creation by Decree No. 14 of 1967, which restructured Nigeria’s Federation into 12 states, Eko, a long-time pseudonym of Nigeria’s Centre of Excellence, had positioned itself as a trade hub and one of Africa’s most boisterous cities. This was captured in the hit track “Eko O Gba Gbere” by the veteran highlife musician, Pa Chris Ajilo, released in 1968.

Despite losing its place as Nigeria’s capital city on December 12, 1991, Lagos has continued its consistent path of industrial growth and has undoubtedly eclipsed every other state with regard to commercial viability and all the indices that promote commerce and industry.

Recently, while reacting to the recent ban of commercial motorcycle riders in the state, the Lagos State Commissioner for Information and Strategy, Mr Gbenga Omotoso, described Lagos state as “a victim of its own success.” When viewed through the prism of the real estate sector, the commissioner’s comments would imply that the successes recorded in the corporate sector over the past few decades have inevitably led to an “expansionist tendency” by most corporate organisations. This, again, explains why almost every major corporate firm is headquartered in Lagos State.

But how will they all fit in? By geographical delineation, Lagos is the smallest state in Nigeria, with a landmass that is 21 times smaller than the largest, Niger. How will all these organisations who want to domicile their base of operations in Lagos find the space to operate? This creates, to a considerable degree, a paradox of “so much for very little.”

Many households and organisations have extended their search for greener pastures to a place that was intended to accommodate only 40  per cent of its population.

Over the last couple of decades, the cost of renting an office space in Lagos, particularly around the highbrow areas of its Island, has been relatively high. In 2021, it was reported that the average cost of renting an office space in Lagos Island stood at N3.6m per annum.

This has led to lower demand due to the declining purchasing power of several corporate organisations which are facing economic downturn and revenue crunch

According to a recent report, prime office segment of the Nigerian real estate market recorded its worst performance in five years with the vacancy rate remaining unchanged as of the second half of 2021.

The report described 2021 as the office market’s less than desirable period when the performance of key metrics such as take-up was at its lowest.

On the other hand, a 2014 report by Quartz Africa noted that Lagos was one of the highest office rent rates in the world, higher than New York, Johannesburg and only $5 per sq ft less than rates obtainable in London.

According to the report, high land prices, construction and financing costs stood tall among the most prominent factors behind Lagos’ high rentals. Other underlying drivers — like double-digit interest rates, inadequate supply of suitable development sites and the need to import materials for construction — have kept development related costs very high.

“There’s the lack of reliable power, which means generators are a must-have. This becomes a quarterly or annual service charge, an additional cost that can be as high as 25 per cent of rent annually. Similar charges in other developed markets can be 10 per cent lower,” the report read in part.

Rentals for prime office space in Lagos (Ikoyi) had skyrocketed as at 2004 to $90 per sq. ft per annum, above those seen in Midtown Manhattan in New York where rents were closer to $76 per sq. ft per annum.  They were also trailing the $96 per sq. ft rents seen in the City of London and more than four times higher than prime office rents in Illovo, Johannesburg.

For yield-seeking real estate investors, the Lagos opportunity might appear attractive at first glance. But the factors behind the numbers are worth digging into.

Gross inadequacy of real estate supply has acted as a major driver to high rents in the past decade. Less than 650,000 sq. ft. (60,000 sq. meters) of prime office space in fewer than 10 high-rise office buildings in Victoria Island and Ikoyi existed in Lagos prior to 2010. Other office towers did exist in the old Central Business District, but their glory days are gone.

As age and congestion began to set in and landlords refused to refurbish, corporates relocated to residential office conversions in Victoria Island. Consequently, demand began to outstrip supply, allowing the few owners of prime office space to get away with seemingly ridiculous rentals.

The historically low supply and opportunity to demonstrate what real prime grade quality office space is like has created interest from global and domestic institutional real estate investors in recent years.

The obvious question at this point is, what changed? How did the once boisterous office space market in Lagos decline so rapidly in a few years? In answering the question, experts have cited factors such as Nigeria’s depressed economy as well as a post-COVID-19 paradigm shift that changed the way firms now work. With a significant degree of personnel now working from home, most corporate organisations do not need as much space as they used to.

The Chief Executive Officer of Global PFI, Mr MKO Balogun, who weighed in his thoughts in a chat with our correspondent, described the decline in demand for office spaces as an emerging trend that was not only obtainable in Lagos, but other parts of the world.

He said, “Two things have happened. Before COVID-19, people hadn’t started thinking about shared spaces, working from home, but COVID-19 came and forced people to adjust. One, they were on full shut-down. Then, after that, people found out they could work from home and still deliver and save cost.  I had conversations with a lot of companies, some of who were the clients we managed. They are reducing their footprints in the offices, even globally, not only in Lagos.”

According to the real estate expert, corporate organisations operated based on cost-effective methods and had now adopted a system that would allow them procure smaller office spaces for a small fraction of their workforce.

“We don’t expect that it continues to be empty. We can still have some semblance of full office operations, but we are going to see a trend where most companies are either downsizing or returning or maintaining the Covid-era arrangement where people work in the office. Immediately after COVID-19 subsided, about six major companies in the US divided their employees into three categories. Twenty-five per cent were those who had permanent stay in the office. Another 40 per cent would come to the office to work when they wanted to work, basically twice a week. Then 35 per cent were to work from home. So, that had an impact on the spaces.

“A lot of people are familiar with the US and the UK. There are people who are turning office spaces into other uses. It’s not a local trend, it’s a global trend.”

Managing Director of MDS Properties, David Mbah, also corroborated Balogun’s sentiments.

Mbah said, “There are several factors that are spearheading this. Number one is the whole COVID-19 outbreak that disrupted the way we worked. It made people have a rethink. So, when the COVID-19 lockdown was in place, people worked from home, but when the lockdown restrictions were lifted, people had a rethink. They thought they could work from home and still deliver results. That is the way workplace culture is shifting.

“They looked at it and asked themselves why they had to maintain those 1,000 square metres of office space when everybody could work from home. They could reduce the size of space from many 1,000 to, maybe, 200 square metres. That way, they cut cost by over 80 per cent. You can see that the incentives are so many. From a cost perspective, it makes sense for the employer. From a result perspective and from a flexibility perspective, it makes sense for the employee because they can work from home, they can be in their comfort zones and still be able to deliver results.”

According to Mbah, there was an over-supply of prime office space in places like Victoria Island, particularly in the wake of the COVID-19 pandemic which put a heavy strain on the financial strength of most corporate entities. This, he said, had played a contributory role in shrinking demand for prime office spaces in the high-brow areas of Lagos State.

He added, “Of course, you know that those who own those buildings have already done their numbers to be able to recoup their investments. So, they can’t go below a certain rental threshold. When you are unable to meet up with paying that kind of rent, the building is going to be empty. When people can’t afford it, your building will be empty. It’s multifaceted, and these are just some of the issues responsible for that situation.”

A realtor, Kingsley Osalume, believes that inflationary pressure and its resultant effect on the economy were primarily responsible for the decline in demand for prime office spaces.

According to him, most landlords, particularly those embarking on frequent property improvements, had been forced to increase rental rates to counteract the impact of expenses incurred on those improvements.

He said, “We all know what the economy has looked like this year. With this inflation, everything is very expensive. The economic outlook determines a lot. People can’t spend money they don’t have. It’s also difficult to spend effectively when so much money gets you very little.”

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