Thursday, 30th November 2023

Commercial real estate dips as firms overhaul spaces, adopt work from home

By Victor Gbonegun
10 July 2023   |   3:05 am
Following the recent increase in price of fuel, overhead costs are no longer sustainable for businesses, forcing many corporate professionals and organisations to rethink their Commercial Real Estate (CRE) space requirements, and adopt Work-From-Home (WFH) model to stave off cost and maximise profit.

Victoria Island, Lagos

These are indeed trying times for the commercial real estate market as office buildings continue to record an increase in vacancy rate and low investors’ interest in major cities. The cost of running offices, and facilities has doubled due to inflationary trends. Many firms are reducing their spaces and working from home to remain in business.

Following the recent increase in price of fuel, overhead costs are no longer sustainable for businesses, forcing many corporate professionals and organisations to rethink their Commercial Real Estate (CRE) space requirements, adopt Work-From-Home (WFH) model to stave off cost and maximise profit.

Recently, the Federal Government removed fuel subsidy forcing pump prices to move from N185 to N550 with widespread economic consequences in homes and businesses. Independent marketers are projecting further rise up to N700 per litre as price of diesel had also gone up to N800 per litre.

This comes with heavy implications for firms with buildings powered with diesel-fired generators. Over 40 per cent of Nigerian businesses, including Small and Medium Enterprises own generators, while associated costs are estimated at over $500 million. This has made many start-ups and entrepreneurs to embrace remote work as the new normal.

Specifically, the skyrocketing fuel prices are wreaking havoc on the construction and building industry, driving up the nation’s inflation rate, worsening the supply chain crisis, thus increasing the cost of doing business. It has also necessitated an increase in service charges, especially electricity tariff in the CRE market.

The Guardian learnt employees in these establishments are demanding for WFH by operating on a hybrid or selective in-person schedule, as many are less willing to drive to offices due to high cost of transportation. The crisis has led some firms to start renegotiating with managers or property owners on the possibility of adapting existing office leases to align with current requirements.

Since the post-pandemic era, activities within commercial real estate remained significantly subdued. Although there was a strong recovery in enquiries in the second half of the year, such enquiries did not translate to actual deals.

The traditional drivers of demand in the office market have shifted downward, while transaction volumes and sizes continued to decline. In highbrow locations like Ikoyi and Victoria Island, asking rents for grade A office space were $700 and $630 respectively, down from $1,000 and $850 in the previous years.

Before now, one of the biggest markers of prestige for most businesses is an imposing, large-scale office building and staff operating within the property. However, the idea is changing, as increasing numbers of people turn away from the traditional model of commuting every day into offices in Nigeria’s city centres.

The development has further created an increased vacancy rate in the commercial real estate sector and put pressure on some landlords of commercial offices to cut down rents and retain tenants. From Lagos mainland to Island areas, vacant luxury office spaces dot the landscape.

A source that pleaded anonymity said his organisation recently introduced the WFH model, when it was discovered that the firm was running at a loss due to monthly expenses of about N500, 000 on fuel monthly.

“The company was running at a loss; we had to develop a flexible scheme of remote working for some of our staff to reduce the office space and amount spent on power generation as public supply is not reliable. We planned it in such a way that only essential staff come to the office two or three times a week. Remote workers are more in Lagos than in other states in Nigeria,” he said.

The growth of remote work has been driven by technology, with Zoom and other conferencing platforms encouraging proximity, while living tens of thousands of miles apart. Traditional office popularity may pass its peak as financial pressures drive businesses to seek smaller, more flexible and cheaper offices.

The Guardian further learnt that to facilitate a transition to WFH model, managers and teams are usually equipped with work tools such as telecommuting (WFH) playbook, which provided guidelines on leading virtually, specially built laptops and other collaboration tools.

Expounding on the issue, former chairman, Niger State branch of NIESV, Prof. Adebowale Kemiki, said work from home has its advantages, which is reducing cost of maintaining offices. He said adoption of work from home would reduce demand for commercial offices and increase the number of voids in the commercial property segment.

“Before the fuel subsidy removal, there has been a drop in demand for commercial space. When the economy is not doing well, people hardly rent offices because there are no contracts, inflation is over 23 per cent, foreign exchange rate is high and multi-faceted issues are facing the economy. We have not had it so bad in recent times,” he said.

Kemiki, who doubles as Dean, School of Environmental Technology, Federal University of Technology, Minna, explained that the development will trigger reduction in investment in office spaces, adding that those who may invest are called ‘casual investors’ who will not study the market because they have access to free money and base their decision on strategic location of property and assume that people will rent such space but will fail to achieve their aim.

“Ideally, investors who conduct feasibility and viability studies will be sceptical in investing in commercial space. When more people work from home, there will be less demand for offices. Another implication is that people that are using for instance, 25 square metres of space before, will now be asking some of their staff to work remotely and in renewing their tenancy, they will reduce their space.

Besides, facility management of commercial complexes will reduce when people work from home two or three days per week, the cost of running generators with diesel, service charge will drop and instead of using bigger generators to power a complex, smaller generators can be used since there are fewer people coming to the office.”

On how the model will impact multi-tenanted office buildings, he said: “We must emphasise a deliberate and collective effort because most commercial complexes are multi-tenanted. So, if tenant ‘A’ says I’m coming to the office on Monday, and ‘B’ is saying no you must come on Wednesday and Thursday; too many variations will not help the property manager.

“Even if there are going to be variations, the tenants must allow the property manager to know, have a forecast for the week of how many tenants are expected for instance on Monday and what kind of generator will be used to service them. But there are some other costs that will be constant, for instance security lights. Whether people are in office or not, the security lights must be put on. Also, whether people are in the office or not, physical security men must be present.”

Chairman, Faculty of Estate Agency and Marketing, Nigerian Institution of Estate Surveyors and Valuers (NIESV) Mr. Kayode Ogunji, said the commercial property sector has been having problems since the COVID-19 pandemic, when people realised that they could work from home. However, he said not all organisations could adopt the model as it is often driven by strong Internet infrastructure.

Ogunji said: “We are already seeing more voids in commercial real estate. Even in the United States of America, it was reported that most of the commercial properties are being converted to residential facilities in city centres like New York because nobody is taking them. That is why they boast of good infrastructure and facilities, unlike Nigeria. It will be cheaper for some people to work remotely.

“Demand for residential property is growing, while commercial property is dwindling. The property market for commercials is going down. We can’t say the market will go up as Artificial Intelligence (AI) is also coming up and will affect a number of people working.”

A past chairman, NIESV Abuja branch, Mr. Emmanuel Alo, believes that the trend will increase demand for residential accommodation. He noted that the boom in WFH would trigger a reduction of the number of cars on the highways as people work within their homes.

“This will affect the real estate sector tremendously because people will not want to invest in commercial property and so there will be a lull. Except when the economic situation improves, then people will move back to offices in their large numbers. There will be more traffic on Information Communication Technology (ICT) infrastructure as more people work from home. During COVID-19, people did more transactions online and I foresee a replay of what happened during that period,” Alo said.