Dubai office rent pressure extends to Grade A space
Despite Dubai’s economy continuing to grow and a healthier level of activity in the occupier market in the first quarter, the office market is still seeing rents fall across the board. Grade A rents have come under particular pressure, and this is very much likely to continue.
First, while GDP growth registered a respectable 2.8 per cent in 2017, the rate is down from 3.1 per cent a year earlier. Not all sectors are growing at the same pace we witnessed last year. A slowdown in the annual percentage growth in three out of five of the largest sectors within Dubai has led to the overall growth rate slowing.
On a broader level, we have seen that of the 20 broad economic sectors in Dubai, 12 have seen the rate of growth slow in 2017 compared to a year earlier. As a result, businesses of all stature are focusing on controlling or reducing costs.
Often real estate is often one of the largest fixed costs for any business and as businesses evaluate costs, it will inevitably be one of the top of the list for firms to try and reduce, although this is not always feasible. For businesses, the current dynamics of demand and supply are supportive for occupiers, putting them firmly in the driving seat when they are looking at securing new accommodation or renegotiating contracts.
Currently Knight Frank estimates that there is over 9 million square metres in total office space, 15 per cent of this is estimated to be vacant. More so by 2020, there is an additional 866,406 square metres of space scheduled to enter. To put this new supply into perspective this equates to more than twice the retail space in The Dubai Mall.
A significant portion of this new supply is classed as Grade A stock. As a result of this new supply, landlords are adjusting to the new reality and have become more proactive in ensuring the long term performance of their asset. The manner in which this has been carried out is similar across both fully-fitted and shelland-core products where incentives such as rent-free periods, delayed rent escalations and free parking are being offered to entice tenants.
Due to the unsettled nature of the market, we will continue to see landlords having to work harder to attract and retain tenants. Landlords of shell-and-core buildings will have to be willing to provide capital expenditure incentives and start to consider active asset management and lease re-gears to retain key tenants. This increased competition has put pressure on rentals not only in the Grade A segment but across the market.
As firms evaluate their accommodation requirements we are seeing a trend towards consolidation of space requirements, partly from cost pressures but also due to firms now moving away from cellular office space to more open-plan and efficient spaces. Older Grade A stock have limited offering of such space and as a result firms are using this consolidation as an opportunity to upgrade to higher quality offices.
Despite this desire, the firms remain very price sensitive. There is an increasing amount of supply which offers such space and priced below Grade A stock. As the areas where this prime stock is located benefit from improving connectivity, occupiers are actively choosing to relocate, causing further pressure on Grade A rents.
Given these trends it is of little surprise that rents fell in the Grade A occupier market by 7.4 per cent in the year to March 2018, compared to the 6.2 per cent fall seen in the wider market.
As we witness greater competition in Dubai and across the Gulf in attracting international corporates, we shall see the occupiers looking for more from their real estate in the Middle East. This has resulted in some occupiers undertaking build-to-suit options or working with landlords in the development phase to ensure the building is fit for purpose.
Buildings have to work from the inside out to meet future requirements, such as sustainability, flexibility and functionality allowing for the occupier to utilise the space in multiple ways as their business evolves. With a maturing market, we expect to see more consultation between landlord and occupier with a view to longer leases being signed, which will allow for more active asset management opportunities for landlords.
This in turn may help the market find support for rental rates in the long run.
■ Taimur Khan is Senior Analyst at Knight Frank.
Landlords of shell-and-core buildings will have to be willing to provide capital expenditure incentives and start to consider active asset management and lease re-gears to retain key tenants.