Blog

Overview

• The Central Business District (CBD) serves as the commercial hub of a city, housing prestigious office spaces, essential infrastructure, and cultural landmarks.
• Currently, cities are undergoing a transformative phase resulting from changing lifestyles and work pattern. This shift is particularly impactful on CBDs, urging them to adapt to remain appealing and competitive amid lower office space demand and evolving commuting trends.

Challenges facing CBDs

• This can be classified into five categories-
• Hybrid and remote-working arrangements:
• Emergence of hybrid work systems resulting from remote working system, e-commerce, and robust infrastructure has brought about transformation in the landscape CBDs. This has prompted companies to reconsider their spatial needs and leading to shifts in the commercial real estate market.
• Developers and property owners have in return responded by revisiting the design and functionality of office spaces.  The adjustment of CBDs to accommodate reduced foot traffic has led to a fusion of in-person and online experiences.
• Aging real estate product:
• The aging real estate in Central Business Districts (CBDs) raises concerns about building obsolescence, impacting occupancy and capital value preservation.
• Outdated structures struggle with modern sustainability, energy efficiency, and technology standards, potentially discouraging businesses seeking contemporary office spaces.
• Competition from emerging locations:
• The growth of newer submarkets in off-core urban fringe locations poses a significant challenge to CBDs. The emerging locations offer attractive alternatives for businesses, thus housing the rapidly evolving creative, tech and R&D clusters and are shifting investor focus from more established submarkets.
• Unstable demand base:
• Fluctuating demand trends resulting from economic shifts, technological advancements, and evolving work dynamics have presented difficulties for CBDs in upholding steady occupancy rates and sustained growth.
• The most susceptible sectors are commercial, hospitality and retail. This has forced property developers and businesses to adopt flexible strategies and diversifying their offerings to cater to changing consumer preferences.

Remedy of the future of CBDs

• To survive and thrive in the future, CBDs need to transform through collaboration between policymakers, local authorities, investors, developers, educational institutions and major tenants.
• This collaboration will catalyse growth opportunities and create a space for CBDs to cater to the needs of all, through continuous research and implementation of innovative technologies and policies that address economic, environmental, and demographic challenges in the built environment.
• Public and private actors must adopt and adapt best practices in planning, infrastructure, sustainability, and wellness investment to respond effectively to changing work, living, and interaction patterns.
• CBDs will evolve from mere workplaces into mixed-use destinations, capitalizing on their central transport connectivity and complementing educational, governmental, and cultural institutions.
• Repurposing existing properties will be vital in unlocking the CBDs’ future by transforming outdated offices to residential, hotel, cultural or other non-work functions.
•  However, not all obsolete offices need to be converted, as CBDs still have the advantage of meeting current tenant demands for office space. Strategic office refurbishments have demonstrated resilience, yielding rental growth and commanding substantial premiums.
• To enhance CBDs’ appeal, interventions like breaking up large development blocks, creating pedestrian-friendly areas, and incorporating inviting retail spaces and green environments are crucial.
• Such measures will not only improve the street-level experience but also counter the effects of climate change. Additionally, strategies such as expanding on-street dining, reducing car traffic, and diversifying businesses, will become more prevalent.
• Breaking up large-scale developments into smaller blocks not only enhances public spaces and design differentiation but also facilitates regeneration logistics.

Implementing and delivering transformation in CBDs

• The transformation of CBDs presents immediate challenges and substantial cross-sector opportunities for both the private and public sectors to enhance urban spaces.
• Achieving a resilient CBD requires collaborative efforts from all stakeholders to unlock its full potential. This involves governments and property owners working together to adapt planning frameworks according to changing real estate trends.
• Investors should conduct research on long-term growth scenarios, considering strategic site selection and occupant preferences to create destination-oriented places.
• Emphasizing locational strategy and ESG considerations will establish new CBD standards, driving investments through innovative approaches like acquisition, development, retrofitting, and targeted improvements.
• These strategies, supplemented with a focus on sustainability, will shape the future of CBDs.

Our View

• The central business districts (CBDs) of major cities, including Nairobi, have historically been popular for businesses due to their central location, accessibility, high foot traffic, and infrastructure. This led to increased property demand, rising rents, and property prices. However, limited space and congestion pushed developers to seek more affordable locations, leading to development in surrounding areas.
• Aging properties in CBDs have prompted the emergence of new, attractive properties in adjacent nodes. This has caused prime tenants to move from CBDs to these emerging areas. Additionally, businesses’ focus on environmental and sustainability concerns has further affected CBDs as they lack eco-friendly features. Hybrid work policies, e-commerce, and shared workspaces have also impacted CBDs’ commercial real estate demand.
• To remain competitive, CBDs are undergoing transformation by adapting to changing work dynamics and competition from emerging nodes. This includes redesigning workspaces for collaboration and technology integration. Sustainability is also a key aspect, with CBDs incorporating green spaces, sustainable architecture, and eco-friendly transportation.
• CBDs are diversifying economically by including cultural, entertainment, and mixed-use spaces to attract a diverse demographic and create vibrant urban centers. Despite these changes, CBDs will remain attractive to small and medium-sized enterprises (SMEs), and retail businesses due to the consistent foot traffic.
• Nairobi is gradually preparing for the future by refurbishing buildings, adopting green technologies, establishing non-motorized walkways, and creating more green spaces. This indicates a positive direction for the city’s CBD development.

Sources: JLL, Mckinsey Global Institute and Sterling Real Estate Advisory