The impact of commercial urban forms on the performance of commercial real estate markets: A case study of Nairobi city
The purpose of this study was to establish the current commercial urban form of the City of Nairobi, the factors that had contributed to the changes in the commercial urban form for the period 1997 to 2007 and the impact of the changes in the commercial urban form on the performance of the commercial real estate market. The review of the existing literature found that the performance of commercial real estate was strongly influenced by the changes in the commercial urban form. The study adopted 'dispersion ratio', commuting time and cost, 'density ratio' and professional/expert opinion as the key indicators of commercial urban form. The study further used location, relocation, investment and disinvestment decisions to identify and rank the important causes of the changing commercial urban form. The performance of commercial real estate markets and sub-markets was measured by analyzing the perceptions of investors and occupants and financial measures of performance (total rate of return and risk). A comparison of the means of the measures of commercial urban form and the performance of the commercial real estate markets was used to test the study hypothesis. A regression analysis was used to measure the impact of changes in commercial urban form on the performance of commercial real estate market. The 'dispersion ratio' and 'density ratio' of the Nairobi City commercial land use was found to be 2.03 and 14.8059 respectively. The mean commuting time was 52.25 minutes and the mean cost of travel was Kshs. 53.55. These findings indicated that the commercial centres were clustered in one section of the city and hence the commercial urban form was polycentric but compact (i.e., many centres but not geographically dispersed). The professional/expert rated the commercial urban form as polycentric with one dominant centre and several sub-centres. The overall rating of the commercial urban form of Nairobi City was 2.62 on a scale of 1 to 5. The commercial urban form was rated as polycentric (multiple centers) but least geographically dispersed compared to other cities of the world such as Bangkok. The main commercial centres are Inner City, (BO, Westlands and Upper Hill, with the linear developments along Mombasa Road emerging as the fifth commercial sub-centre. These centers are differentiated by levels and quality of infrastructural developments and urban services, rental rates, type of developments (buildings), occupancy characteristics and density and land values. The centre that recorded the highest growth rate during the period selected for this study (1997-2007) was Upper Hill at 14.43%. The zero growth rate ofInner City and the negative growth rate of Westlands (-5.16%) and CBD (-9.30%) is an indication that the commercial urban form of Nairobi City had changed over the period selected for the study. The most important factors influencing location and relocation decisions and hence the commercial urban form of Nairobi City were identified and ranked as follows: 1. Physical state of Inner City; 2. Increase in population; 3. Increase in property prices; 4. Individual location decisions; 5. High economic growth rate; and 6. Increase in rent. The poor physical state of the Inner City stood out as the most important factor that had caused the current commercial urban form. The poor spatial condition of the Inner City was caused by poor urban land management, failed urban management, underinvestment in infrastructure and rigid planning regulations. The study recommended that understanding, directing and managing the above factors would result in an orderly and efficient city that offers the most competitive performance of the commercial real estate investment. The analysis of decision-making in commercial real estate revealed that investors evaluated the physical condition of the centre and the likely future changes before making investment and disinvestment decisions. The most important factors considered in selecting the location (sub-market) were returns, size of the commercial centre, planning regulations and nature of property ownership (land tenure). The study found that investors would retain an investment in a centre as long as the centre offered a chance to increase rent to match inflation and pass over the entire running costs to tenants and where the rate of return was higher than the market average rate of return. The findings confirmed that investment decisions in commercial real estate investment were undertaken on the basis of commercial sub-centres. The analysis of the financial measures of real estate investment revealed a pattern of distorted and falling performance for the period 1997-2007. This was the period of rapid changes in the commercial urban form and the study concluded that spatial changes and commercial real estate performance was inversely related. The analysis of the total rate of return found that Upper Hill (13.95%) was the peak of the commercial real estate market in Nairobi City while Inner City (3.27%) was at the bottom of the hierarchy. Upper Hill had reported the highest variations in the total rate of return and hence the highest risk exposure. On the overall, the performance of the commercial real estate market had fallen from a mean total rate of return of 10.52% in 1997 to 6.69% in 2007. The inverse relationship between changes in commercial urban form and the performance of the commercial real estate market confirmed that the emergence of multiple commercial centres (change in commercial urban form) resulted in distorted performance of commercial real estate market. The negative regression constant further suggested that the relationship between changes in commercial urban form and the performance commercial real estate markets was an inverse relationship. The hypothesis of the study (that the emergence of multiple commercial sub-centres in Nairobi City resulted in distorted performance of the commercial real estate market) was, consequently, supported by the data collected for this study. The surrogate measures of commercial urban form that contributed the most to the performance of the commercial real estate markets were 'occupancy density ratio', 'net growth rate' and 'net future inflows'. These findings suggested that occupancy density, the growth rate of specific sub-centre and the entire city and the expectations of future inflows by occupants and investors are the main factors affecting the performance of the commercial real estate markets. It is, therefore, possible that an urban centre can record positive performance of the commercial real estate market if it proactively manages occupancy densities and the extent and pace of growth of the various sub-centre. The study recommends urban regeneration programs and review of urban management policies and systems in order to achieve an efficient city with high performing commercial real estate markets. This is expected to ensure that all commercial subcentres, the original and the new emerging centres, are appealing to investors and renters, being differentiated only by nature of business and age of occupants. This will ensure that the performance of the commercial real estate is positive and not inverted (distorted). The study posits that this can only be achieved by comprehensive, focused and continuous research on the phenomenon of changes of the commercial urban form and the performance of the commercial real estate markets.