The 2023 Commercial Real Estate outlook in Africa

Written by Boniface Abudho, senior research analyst, Knight Frank

At the start of 2022, many property developers in Africa had mixed feelings about the future of the Commercial Real Estate market on the continent.

There were many vacant spaces in the commercial sub-sector, with heightened concerns fuelled by working-from-home patterns, increased inflation, rising unemployment rates, and the on-going devaluation of local currencies.   

As 2022 ends, the picture seems to be changing for the better. Here are some of the trends we expect to define 2023: 
 
1.Data Centres  

According to our recently released Africa Industrial market dashboard, data centres and modern logistics facilities are fast emerging as significant new demand drivers in Kenya, Nigeria, and South Africa.  

Investors, landlords, and developers are responding to rising requirements by expanding existing data centres and building high-quality warehouses, which remain in short supply.

A closer look at the Nairobi market indicates that there is a rising demand for cloud storage requirements as businesses rapidly expand their online platforms, driving a surge in data centre requirements. In turn, investors are increasingly active in this space, with Africa Data Centre (ADC), for instance, announcing an investment in excess of US$ 200 million for data centres in Nairobi and a third one planned soon. Nairobi currently has seven data centres owned and operated by Telkom Kenya, PAIX Data Centre, Safaricom, Icolo, SimbaNET Comm, and ADC. 

2. ESG considerations 

Throughout 2022, there has been an increased focus on best-in-class office space by occupiers, which has supported rental growth and high occupancy levels across many of the continent’s prime office buildings, which remain in short supply in a number of markets.

Businesses are actively targeting higher-quality space to mitigate talent retention challenges and meet increasing ESG considerations, which are primarily confined to international businesses. According to our research, Africa has approximately 785 green-rated buildings, and 641 are in South Africa alone. For comparison, the United States has 81,000 green-rated buildings. 

       
If Africa is to reach the targets set as part of the reaction to the globally recognized “climate emergency” then real estate needs to play a significant part, as almost 40% of all carbon emissions originate from the built environment. Governments, regulators, and those looking to have an impact will have to work hard to bring this figure down.

Several governments around the continent have already passed legislation to encourage the development of ESG-compliant buildings. The Nigeria Code of Corporate Governance (NCCG), for instance, encourages companies to pay adequate attention to sustainability issues including environmental, social, occupational, and community health and safety, as they ensure successful long-term business performance and project the company as a responsible corporate citizen contributing to economic development.  

3. Hybrid working 

The pandemic changed nearly all aspects of our lives. Some businesses reassessed their office needs and adopted hybrid working patterns as a cost-saving mechanism.  

To maintain occupancy, landlords will need to do better to deliver what occupiers want, such as modern, prime Grade A space that is also ESG compliant. 

It is noteworthy that occupancy levels in some African countries have remained relatively stable despite the widespread adoption of hybrid working. This has been driven by greater landlord flexibility as well as the inability to break leases. Nonetheless, more firms are downsizing or renegotiating their leases on expiry.  

4. Rising economic woes 

Despite emerging stability in the office market, many African countries are struggling with spiking inflation and repeated currency devaluations, which are stalling economic recovery and making some occupiers nervous about pursuing expansion plans.  

The war in Ukraine is adding to economic woes, with global growth expected to slow from an estimated 6.1% in 2022 to 3.6% in 2023 according to the IMF projections. This situation is exacerbated by increased unemployment rates across the continent.

According to Oxford Economics, the unemployment rate in South Africa was at 32.9% in Q3 2022. The official unemployment rate remains above pre-pandemic levels and unsustainably high. Employment increases for manufacturing, trade, construction, transport, and community & social services were reversed by job losses in finance, mining, and agricultural industries, many of which are key drivers of office space demand.  

Overall, Africa is slowly returning to normalcy, and the Commercial Real Estate market has registered growth in 2022. The sector anticipates a better year business-wise in 2023.