A flight to quality for commercial real estate
Occupancy levels and rents remain under pressure in the office market as existing supply issues and low demand impact unit absorption in the UAE
We have seen limited levels of activity from new entrants in the market Taimur Khan Head of Research, Knight Frank ME
Tenants looking for renting office space in the UAE will find landlords offering them incentives and attractive lease terms in this favourable, tenant-friendly market. Fullyfitted plug-and-play units in superior built-quality towers are seeing a resilient demand compared to core-and-shell units that continue to face absorption issues, say real estate experts.
Robert Thomas, head of agency at Core says, “Last year saw nearly 1.5 million square feet of office space brought to market, bringing the total Dubai office stock to 104.9 million square feet as of Q4 2020. Of the total 104.9 million square feet of office stock, nearly 25.2 million square feet of the stock is vacant (24 per cent of all Dubai office stock), and the volume of the vacant stock is gradually increasing over the last five years.”
The occupancy levels and rents remain under downward pressure in the office market as existing supply issues and low demand impact office absorption, explains Thomas. “New office deliveries, a significant amount of secondary market stock has also been brought to market as firms restructure their manpower and spatial requirements in the wake of Covid-19, further impacting occupancy levels,” he says.
“Most new demand has stemmed from relocation activity, particularly from SMEs and regional occupiers as most businesses adapted to market conditions. Moreover, international corporates are largely continuing to work from home with their real estate decisions deferred to the second quarter of this year, subject to the wider public being vaccinated. We expect the second wave of relocations in 2021 when large corporates inevitably adjust their workplace strategies,” he adds.
Flight to quality
Faraz Ahmed, research associate at JLL Mena says tenants are seen interested in relocating to quality space, particularly in Dubai, resulting in greater polarisation across the market. “Average Grade A Central Business District rents declined by 3 per cent (Q4 2019 vs Q4 2020) in Dubai to reach approximately Dh1,670 per square metre. In Abu Dhabi, headline rents for Grade A offices also decreased by 2 per cent to register Dh 1,575 per square metre over the same period.”
Ahmed says smaller fittedout units of between 100-300 square metre are being favored by tenants, considering corporate cutbacks on operational and capital expenditure. In Abu Dhabi, demand is for serviced offices, he says
Taimur Khan, head of research, Knight Frank Middle East, talks about subdued demand, with the market geared towards the 100 square metres segment and fitted-out space requirements being favoured. “Large shell and core requirements remain relatively rare, particularly those originating from the private sector, making it a tenant-favoured market.”
“We have seen limited levels of activity from new market entrants in Dubai’s corporate occupier market. And where we are seeing new market entrants or existing occupiers seeking additional office space, it is largely driven by the project led demand. The vast majority of demand in the market continues to stem from existing market participants looking to consolidate operations or improve their space quality. In response to this, landlords attempt to retain tenants, offering them competitive rent-free periods,” says Khan.
“As of the fourth quarter last year, average prime rents in Dubai registered at Dh206 (sq.ft./p.a.), down 3.0 per cent compared to the same period a year earlier. Grade A, office rental rates see moderate declines on average in the 12-months to Q4 2020, where rents fell by 4.0 per cent, registering at an average rate of Dh 129 (sq.ft./p.a.). Citywide rents declined by 6.9 per cent over the same period to an average of Dh99 (sq.ft./p.a.). Vacancy in Dubai’s office market is estimated to have increased by 5.5 percentage points in 2020 to 24.3 per cent. While prime and Grade A vacancy rates have edged higher over the last year, citywide stock has seen the most significant increase in vacancy rates,” says Khan. The sector, however, remians hopeful with a number of new initiatives being launched to boost demand for the commercial real estate in Dubai.