Following economic headwinds that continued to paralyse business activities, many international and local employers have begun to reduce their office space, increasing vacancy rates in the commercial real estate market.
The idea of reducing office space by corporate organisations started with the COVID-19 pandemic era when remote work and online meetings gained traction, as well as due to the rise in office rents.
The downstream sector’s deregulation has also increased fuel costs and many workers are finding it difficult to pay for transportation. This development has rekindled the idea of space reduction.
According to a survey of 347 companies worldwide by Knight Frank, a UK-based real estate firm, around 50 per cent of major global companies intend to downsize their office space in response to the growing adoption of hybrid work models.
The new research has found that half of firms with more than 50,000 employees plan to prune office space, with most anticipating a reduction of between 10 per cent and 20 per cent.
However, this contrasts with the expectations of smaller firms surveyed – those with up to 10,000 employees – just over half (55 per cent) of whom said they were expecting to increase their global office space.
The Fusion Chronicle Nigeria Newspaper gathered that from 2019 to 2024, prime office space rents across key cities showed upward trends. Abuja’s CBD saw average price increases from N40,000psm in 2019 to N169,260 per square metre (psm) by 2024. Prime office rents in Lagos also spiked, with Lekki Phase 1 reaching N180,000psm in 2024 – up from N60,000 psm in 2019. By 2021, the demand for prime office space was further fuelled by a return to business activity (post-pandemic).
Old Ikoyi and Victoria Island reached N375,000psm and N245,000psm, respectively. Demand growth appears concentrated in Lagos, where supply remains tepid. Grade A developments, with some multinationals renegotiating leases for smaller spaces or exiting entirely.
The devaluation of the naira has not helped as several dollarised rents when converted to naira become expensive. Such rents have been negotiated downwards in dollar terms, while oftentimes; it’s still higher in naira terms. For instance, rent of $800/m2 in the year 2020 when the exchange rate was N380 to one dollar was about N304,000. Lagos is witnessing a 50 per cent drop in dollar terms of the same rent to $400, which takes the rent up to N620,000/m2 at N1550 to $1.
One of the firms reducing its office space in Lagos is Meta. The company recently announced plans to reduce its real estate footprint to transition some employees to desk sharing, particularly those who spend little time at work.
Meta, the parent company of Facebook, Instagram, and WhatsApp, has reportedly renegotiated its tenancy agreement at the Kings Tower building in Ikoyi, Lagos. Meta stated that it reviews office space regularly to ensure that it meets the needs of the business, including its Nigerian office. “As we shrink our real estate footprint, we’re transitioning to desk sharing for people who already spend most of their time outside the office.”
According to Jones Lang LaSalle, the global vacancy rate for commercial office space rose to a new all-time high of 15.9 per cent in the third quarter of 2023. The CBRE study of global workplaces released recently found a 22 per cent decline in average square foot per person, relatively low office space utilisation rates; and plans by 43 per cent of the organisations to reduce their office space by more than 30 per cent over the next three years.
Fusion Chronicle Nigeria Newspaper gathered that there are fears that a rise in delinquencies as a result of the downturn could cause significant losses at banks that finance many commercial real estate deals. High interest rates and declining rent income mean borrowers are beginning to have trouble staying on time with loan payments.
Experts confirmed that companies are reducing their office footprints or not expanding their spaces even when increasing their workforce because of recent trends and current economic realities.
The Chairman of the Nigerian Institution of Estate Surveyors and Valuers (NIESV) Board of Trustees, Prof Austin Otegbulu, said reducing space requirements is not automatic as companies will need to serve adequate notices to their landlords of their intention to give up some space at the expiration of their rent or current lease.
“I have not experienced this, but I am aware that it’s happening in Lagos, particularly in the upper-end (Grade A) office properties. Some companies have come to realise that their staff can work remotely and achieve the same result.
“In consequence, they resort to remote working or working some days from home and other days in the office. This practice is technically known as officing. If the staff has to be coming to work every day, it will trigger a request for a salary increase,” he said.
Otegbulu said for the companies to achieve this, they may have to provide working facilities like tables and office laptops to their staff. “The staff will also require internet facilities and power. The office should weigh the cost and benefits of this option to enable them to make an informed decision.
“The impact of this is not immediate, as in chattels or related goods. For real estate, the vacancies can only become effective at the expiration of current rent paid or leases. Thus, the response to demand and supply is gradual and slow.
He said the effect of this on the office property cannot be predicted with precision. In addition, the effect will not be uniform on all the categories of office property, the impact will be more on the upper-end office property. He emphasised that there will always be demand for office property considering that it’s a derived demand, adding that there will always be a need for office space for various categories of services that trigger local demand such as legal, medical, dentistry, insurance, accounting, real estate and appraisal, and auditing.
According to the President, Association of Facility Management Professionals Nigeria (AFMPN), Dr Paul Erubami, the main drivers of this shift are remote, hybrid and virtual work trends and rising real estate costs.
He explained that the return to work after the COVID pandemic revealed that for some sectors and certain demographics, the office environment is not more productive. “Recent economic pressures on businesses are also causing closures of companies and contraction of operations with attendant lay-offs.
“There is an upsurge in the workplace-as-a-service or space-as-a-service business models where office accommodations are available on a pay-as-use basis that enables companies to fulfil temporary or project-based surge in office requirements without having to lease or build new or extra spaces.”
Erubami further said work-from-home driven by the gig economy, Gen Z and the youthful workforce’s preference for flexibility and work-life balance is also moving workplaces into homes.
He said the supply of new commercial real estate is responding to the stagnant demand for new office spaces by delaying the completion and start of development of new projects, while investment decisions are being delayed due to uncertainties in the forex market, as well as the runaway inflation.
However, Erubami disclosed that the current situation is only temporary. “I foresee a rebound. The office or commercial real estate sector is merely mirroring the general economy. Most of the issues causing stagnation in this sector will also ebb out when the economy rebounds and growth returns. So, it is not all doom and gloom for this critical real estate sector,” he said.
For the Chairman, Lagos branch of the Nigerian Institution of Estate Surveyors and Valuers (NIESV), Gbenga Ismail, there’s a shift in office space requirements, “Companies are moving away from large and permanent spaces, as well as reducing their footprints, and reflecting a more flexible approach to workspace management.”
He said the trend started with COVID-19, which encouraged companies to adopt remote work. “Over time, organisations began to realise they could operate effectively with less space and reducing office space lowers operational expenses. Companies are finding success with flexible scheduling and remote work.
These options offer employees a better work-life balance, which can boost productivity.”
According to him, commercial rents have been stagnant, facing downward pressure. However, demand has increased for smaller spaces, particularly around 50-100 sqm, which raised rents for Grade B and C properties.
“Despite reductions, offices will remain relevant in some form. A noteworthy example is the real estate agency EXP, which operates with nearly 70,000 agents entirely through a virtual office. This virtual model might just be the future of office spaces,” he said.
The Group Managing Director, Global Property & Facilities International Limited, Dr MKO Balogun, said global surveys on work have shown that people can work anywhere and be efficient and productive. “The new generation workforce is driving major changes in the work environment, companies globally are adopting hybrid and work-from-home cultures,” he added. Balogun predicts a reduction in new commercial development and expects the existing ones to align themselves with the current realities.
