Government’s Move to Own Offices: A Paradigm Shift Impacting Commercial Real Estate

In a strategic move aimed at reducing operational costs, President William Ruto’s administration is contemplating a significant shift from leasing to owning office spaces. This decision, while fiscally prudent for the government, poses substantial challenges for commercial property landlords who have long relied on government leases as a stable source of income.

The Rationale Behind the Shift

The Treasury, in its draft 2025 Budget Policy Statement, emphasized the need to prioritize the construction of government offices over renting. The report highlighted public concerns regarding the exorbitant costs associated with leasing in prime commercial areas. It stated, “[The government will] consider a one-stop shop for all government agencies. The Public Administration and International Relations sector has prioritized the construction of offices as opposed to hiring, including foreign missions.”

Traditionally, the Housing Ministry has identified prime locations such as Community/Upper Hill, Westlands, the Central Business District (CBD), Hurlingham, Kilimani, and Milimani in Nairobi as ideal for state ministries, departments, and agencies. However, during public consultations for the upcoming fiscal budget, taxpayers expressed apprehension over the high leasing costs in these upscale areas.

Challenges in the Construction Approach

While building new office spaces may offer long-term savings, it is not without challenges. Historical precedents, such as the construction of Bunge Towers—which took 14 years and cost Sh9.2 billion—underscore the risks of cost overruns and project delays. Such instances raise concerns about the efficiency and feasibility of large-scale government construction projects.

Impact on Commercial Landlords

This policy shift comes at a time when developers of commercial office buildings are already grappling with high vacancy rates. A 2024 real estate survey by the Kenya National Bureau of Statistics revealed that office spaces constituted nearly two-thirds of advertised commercial properties for lease, yet they were the least rented. Approximately 34.4% of office spaces advertised in 2023 remained unoccupied due to poor demand—the highest rate of unrented space among commercial property types.

The report noted, “Commercial properties advertised for rent may not be rented out due to various reasons, such as lack of clients. The survey findings indicated that over 50% of all commercial rental properties that were on offer for rent in 2023 were rented during the year.”

Historical Concerns Over Leasing Costs

The high cost of leasing offices for state agencies has been a longstanding concern. The government spends upwards of Sh5 billion annually on hiring office space. Past data indicates that the cost of rentals for buildings leased by the state rose to Sh5.9 billion for the year ended June 2018, up from Sh5.4 billion the previous year.

In a 2019 budget speech, then-Treasury Cabinet Secretary Henry Rotich remarked, “The government has been leasing office space at higher market rates, resulting in huge costs to the government.” The plan at that time was to standardize procurement of office accommodation with uniform cost leases, and existing contracts were to be renegotiated to ensure a standard rate.

Foreign Missions and Leasing Costs

The Foreign Affairs Ministry accounts for a significant portion of the expenditure on rent, leasing offices and residences for Kenya’s envoys abroad. In recent years, the ministry has leaned towards constructing and purchasing spaces for missions abroad to mitigate leasing costs. For instance, Kenya is in the process of completing the purchase of a chancery in London for Sh2.67 billion to alleviate annual lease costs of approximately £350,000 (about Sh56 million).

Other countries where Kenya is either building or purchasing property for its envoys include:

• New Delhi: Sh2 billion
• Stockholm: Sh1.6 billion
• Geneva: Sh1.3 billion
• Juba: Sh1.5 billion
• Berlin: Sh1 billion
• Kigali: Sh750 million
• Bujumbura: Sh500 million
• Mogadishu: Sh350 million
• Pretoria: Sh50 million

The Leasing vs. Owning Debate

The government adopted leasing as an alternative to acquiring assets, including vehicles, to avoid high upfront costs and associated recurrent expenses such as insurance and maintenance. The previous administration under President Uhuru Kenyatta, for instance, heavily relied on leasing vehicles, especially for security agencies. The multi-year car leasing program was designed to provide efficient and cost-effective transport to the government workforce by offering affordable access to vehicles.

However, studies and audits commissioned by the Treasury have revealed gaps in the leasing scheme, including a lack of an effective management structure to ensure operational efficiency. The vehicle leasing program was projected to save taxpayers Sh4 billion annually, but findings from a 2022 study suggested that savings averaged only Sh70 million per year. The study showed that the government saved Sh638 million over nine years under the vehicle leasing deal, which was intended to trim heavy upfront acquisition costs and control runaway maintenance expenses.

The Treasury noted, “The absence of a standardized leasing framework has resulted in inconsistencies in leasing practices across ministries, departments, agencies (MDAs), and county governments.” To address this, the Treasury is developing a comprehensive leasing framework to provide clear, standardized guidelines and processes for the leasing of government assets across all public sector entities.

Global Perspectives: A Similar Trend

This move by the Kenyan government mirrors trends observed in other parts of the world. For instance, the Victorian government in Australia announced plans to abandon approximately 20,000 to 40,000 square meters of office space in Melbourne’s CBD over the next 2-3 years. This decision was influenced by increased remote working and a desire to reduce operational costs. The reduction is part of a broader trend of downsizing as more staff work from home. JLL, a commercial real estate firm, noted that this move will significantly impact Melbourne’s commercial real estate sector, which is already facing a vacancy rate of one million square meters.

The government currently rents close to 300,000 square meters of office space in the city. Lord Mayor Nicholas Reece is exploring innovative solutions to repurpose these vacant offices, such as converting them into vertical schools, hospitals, aged care facilities, or entertainment precincts, inspired by the concept of vertical cities like Singapore. This approach aims to revitalize the CBD and avoid the environmental costs associated with demolishing older buildings.

JLL’s figures indicate that the 15 largest corporate groups have vacated 320,000 square meters of office space since 2020, although there are early signs of recovery. Demand for prime office spaces remains strong, particularly from legal and financial sectors, with expectations that education and biomedical groups will also contribute to future leasing activities.

The Road Ahead

As the Kenyan government deliberates on this significant policy shift, it must weigh the potential cost savings against the broader economic implications. The construction of new government offices could lead to long-term savings but also carries risks of delays and budget overruns. On the other hand, reducing reliance on leased spaces may adversely affect the commercial real estate market, leading to higher vacancy rates and financial strain on landlords.

For commercial property owners, this development signals the need to diversify tenant portfolios and explore alternative uses for office spaces to mitigate potential losses. As the landscape of government office accommodation evolves, stakeholders must remain adaptable and forward-thinking to navigate the challenges and opportunities that lie ahead.

Conclusion: Exploring New Opportunities

The government’s initiative to construct its own office spaces marks a pivotal moment in Kenya’s real estate sector. While this move aims to enhance fiscal prudence, it also presents an opportunity for investors and property owners to reimagine

About The Author