Commercial real estate development declined by 14% in 2022

A new report has revealed that development activity across the commercial real estate sector in Lagos declined by 14 per cent in 2022 compared to 2021 amid currency challenges and rising inflation.

The report by pan – African real estate research and data firm, Estate Intel said the office sector recorded a decline to 16 per cent of total stock from the 25 per cent recorded in 2022.

However, it stated that the sector has continued to remain resilient in terms of occupancy rates despite pandemic headwinds and leasing activity still being driven by relocations.

The office market continues to exhibit varying levels of occupancy across different grades. The B+ grade segment appears to have the highest occupancy level at 78.36 per cent, while the A and B+ grade segments have 71.35 per cent and 75.35 per cent occupancy levels respectively.

However, the A+ office market currently has an occupancy level of 54 per cent owing to the recent completion of Famfa Oil Tower, which has added 18,500 sqm of leasable A+ space into the market.

According to Insights Lead, Estate Intel, Tilda Mwai, the retail sector remains relatively subdued, while the sector recorded the second largest share of the development by 33 per cent. Approximately, 60 per cent of the projects remain on hold with only 23 per cent under active construction.

This, she explained, has been attributed to currency devaluation, shallow tenant pool, rising construction costs and diminishing disposable incomes.

“The momentum that began in 2021, was sustained throughout the year with a slow and steady return to construction and real estate activity. However, currency challenges and long-term trends such as the evolving landscape of consumer purchasing power in the retail sectors continue to impact occupancy levels and achievable rents especially in the grade A malls,” Mwai said.

The report stated that hotel sector also had one of the largest development streams, accounting for approximately 36 per cent of estimated total stock. Interestingly, the report said the sector’s outlook remains positive and has emerged as one of the best performing real estate sectors, with its RevPAR recovery against 2019 outperforming key global hubs such as Dubai, London and Hong Kong.

Mwai said despite the volatility in the macro-economic environment, the real estate market has remained resilient with bright spots emerging across sectors such as residential and healthcare.

“Rapid infrastructure development too, has also ushered in new opportunities for developers and investors in Lagos and its neighbouring states such as Ogun as highlighted in this report.

“This will no doubt present new opportunities for developers, especially in the industrial sector. Although in its niche stages, it remains one to watch out for, buoyed by the rapid infrastructure developments and demand from the agriculture and manufacturing sectors.

“ Still, promulgation of the new government could usher in new policies such as fx convergence which could in turn impact on institutional investor confidence,” she said.

Reacting to the report, Trevor Ward from W Hospitality, said: “For over 20 years, people have been forecasting oversupply in Lagos, it has never happened, nor do I believe it will, at least not in the short to medium term.

“The headwinds for new hotel development are severe right now. So, investment in new build is being delayed, but there are opportunities in acquisition of existing hotels and potentially, there should be scope to pick up uncompleted projects at a discount.”

With the housing deficit in Lagos estimated at 2.3 million units, the residential development estimated at over 25,000 units falls short of meeting demand pointing to an exciting opportunity for developers especially, in the middle-low end segments of the market.