Are office rents expected to continue rising? This is a question we are often asked, and the short answer when analysing the current supply and demand is that the only way office rents and occupancy levels are going in the near term is up.

Coming off the pandemic dip, Dubai’s office market continues its upward trend in rents and occupancy levels across the city at record levels driven by positive economic sentiment, ease of doing business, and a host of economic drivers resulting in job creation and influx of occupiers. This is evidenced by the higher number of new license registrations across Department of Economic Development (DED) and free zones. We have already surpassed the 2014 peak office rents and the Dubai office market has seen an increase of over 45 per cent in city-wide office rents since the pandemic, with a year-on-year increase of 24 per cent.

During the 2014 peak, the total office market size was just over 81.5 million sqft, and city-wide office rents were Dh125 per sqft/year, while today the market size has grown over 32 per cent and is at 107.6 million sqft with city-wide rents surpassing Dh138 sqft/year.

 

Scarcity in office stock in the near future

Demand is outstripping supply at an unprecedented pace with office occupancy levels at an all-time high. Prime/Grade A office occupancy levels are hovering at 92 per cent while citywide office occupancy levels are at 87 per cent. To give perspective, only 75 per cent of the office market was occupied pre-pandemic.

This surge in demand after the pandemic has resulted in over 11.5 million sqft of office stock being absorbed in the last three years, with over 9 million sqft absorbed in just the last 18 months. In contrast, only 2 million sqft of stock is expected to be handed over the next two years, with most of the stock being pre-leased, therefore not addressing the supply scarcity.”

Uptown Tower by DMCC was handed over recently (entirely pre-leased), adding over 495,000 sqft of office space and bringing Dubai’s office stock to 107.6 million sqft. Previously, major office handovers in 2022 were across the Expo District, Deira Enrichment Project, Dubai CommerCity and Dubai Hills Business Park. Further projects expected this year are the office component of One Zabeel, Innovation Hub One in DIFC and the next phases of Dubai CommerCity.

6 Falak in Dubai Internet City and Tecom’s Innovation Hub Phase 2 are both witnessing strong pre-leasing activity and are expected to be handed over in 2024.

Most of the office supply pipeline is already pre-leased, therefore offering very limited availability upon delivery.

While free zones such as Dubai South, Expo District and the outer Tecom clusters have some existing office inventory, DED-licenced central locations are severely short on supply. With very limited new onshore office stock currently under construction, we are witnessing many single landlords (with a land portfolio) and free zones looking to activate new office projects or upgrade/repurpose existing office stock. However, as it would be at least a two to three-year construction cycle, we expect to have an office supply crunch over the near term, therefore creating further upward pressure on rents and occupancy levels.

The Challenge

With the pace at which we are witnessing absorption, and with the lack of secondary and new office supply, we are looking at a severe undersupply of Grade A office stock over the next 18-24 months. That said, with many developers activating office projects, we expect the supply-demand imbalance to be addressed by 2026 when most of the ongoing projects are handed over. Furthermore, major global occupiers with large office requirements may find purpose-built options within free zones.

 

Rising rents and occupancy levels

As demand for offices intensifies across the city, office districts have witnessed year-on-year increases in the range of 5 to 50 per cent.

This demand is primarily centered around Grade A projects across both free zone and onshore areas. Driven by their sustainability mandates, occupiers continue to gravitate towards new Grade A developments with regional and international tenants actively seeking single-owned, efficiently managed, green buildings. Although older stock is witnessing spill over demand, it is expected to face mid-to-long-term challenges as it continues to age and would require significant investments to upgrade.

 We have seen rental increases to be higher in districts where most of the office stock is strata (an office building owned by multiple owners) as they were rising from a significantly low base compared to freezone-owned and single-landlord stock.

Aware of favourable market conditions, many landlords (especially those with fitted units) are now achieving asking prices or in some cases premiums on asking prices as well as receiving fewer rent checks.

As the need for short-term plug-and-play offices continues to increase, particularly from new market entrants looking to set up operations and expand, we are witnessing a surge of enquiries from serviced office space operators. Most global serviced office occupiers such as WeWork, ServCorp and Regus are running at capacity and many more local operators are also at high occupancy levels.

Where is the demand coming from?

We have seen demand almost equally split between new market entrants and existing occupiers looking to expand. Demand is largely stemming from the banking, financial and business services sectors followed by the technology sector, The strong economic backdrop, ease of doing business and competitively priced office rents compared to other gateway cities along with Dubai’s central location and overlap with multiple time zones across both western and eastern markets make it ideal for firms to house their offices here.

Market outlook

Tenants are increasingly becoming aware of the changing market conditions and are managing within existing premises where possible through workspace strategies and opting for hybrid working as options for spatial expansions are becoming limited.

On the other hand, single-owned Grade A assets are well-positioned, both in terms of headline rents and occupancy levels, and due to strong pre-leasing interest, freezones and prominent single landlords are looking at activating the next phases of their office projects. However, aging office stock is likely to face challenges in tenant retention and satisfaction. Landlords of older buildings will be pushed to look at refurbishing their underperforming assets to enhance rental returns and align with the market.

With sustained demand from new market entrants, incumbents expanding across all sectors, and with very limited available office stock, we expect Dubai office rents to continue increasing, with another 10-20 per cent rise expected in prime areas along with occupancy levels facing upward pressure over the next 18-24 months.

(Prathyusha Gurrapu is Associate Director – Head of Research and Consultancy, Cushman & Wakefield Core, UAE)

 

Copyright © 2022 Khaleej Times. All Rights Reserved. Provided by SyndiGate Media Inc. (Syndigate.info).