Saudi Arabia’s office market needs more high-quality space

Office space rents remain under pressure in Saudi Arabia this year due to subdued occupier demand and a sluggish economy, according to a new report.

While the Kingdom recorded a pick-up in economic growth in 2018 due to improved oil prices, declines recorded in late 2017 still drag on the office-space rental market, the research published on Tuesday by real estate consultancy Knight Frank found.

Saudi Arabia’s major cities and business hubs continue to suffer from a lack of the high-quality grade A stock most sought-after by private and public companies.

Rents for the lower-end and increasingly dated grade B space have softened, with potential renters put off by issues such as poor accessibility or lack of parking. “The slowdown in the office market continued in 2018, as subdued occupier demand weighs on market-wide rents and occupancy levels; while key prime schemes continue to perform better than the average market as a result of limited stock of high quality assets,” said Raya Majdalani, research manager at Knight Frank.

Demand could recover in the longer term as reforms under the government’s National Transformation Plan and Vision 2030 begin to feed into the economy, the report said.

Economic growth is projected to reach 2.2 percent this year and 2.3 percent in 2019, according to the International Monetary Fund (IMF) estimates.

Urban regeneration initiatives such as mixed-use communities will act as a “catalyst” for the sector, Knight Frank said.

Demand in the capital city of Riyadh remains flat, with only a handful of grade A properties such as Kingdom Tower, Al-Faisaliah tower and Business Gate retaining high occupancy levels, the report found.

The King Abudullah Financial District is set to hand over phase 2 stock after 2021, which is expected to boost supply of quality space.

Average third-quarter Riyadh rents for grade A property stood at SR1,550 per square meter per year, while grade B rents stood at SR775 per square meter.

Renters in Jeddah are also waiting for a fresh supply of high-end office space, with the planned Jeddah Gate project, from the Dubai-based developer company Emaar, set to deliver about 230,000 square meters of high-quality office space in a mixed-use environment.

Knight Frank said that it remained “cautious” about the “timely delivery” of scheduled projects, adding it expects further delays given market conditions.

Grade A rents in the Red Sea city declined by 4 percent yearon-year and Grade B rents fell by 13 percent.