Dubai: The hot streak Dubai’s industrial real estate sector has had for the better part of three years in terms of demand is showing signs of slowing down. But thankfully, rentals in key locations are still showing signs of stability.

What is happening now is that newly delivered warehouse space in emerging industrial locations is generating higher demand because the rents are lower. This is leading to a “flight to quality amongst existing occupiers, creating a growing pool of more secondary space, which is slow to let,” states a new Cluttons report.

“This is driving a growing gulf in rents between older stock and state-of-the-art warehouse facilities. Jafza [north], the original home of Jafza [Jebel Ali Free Zone Authority], is, for example, experiencing a rising amount of such stock as occupiers drift to new facilities in Jafza [south].”

If that is the case, this would mirror trends seen in Dubai’s office space, where recently completed Grade A buildings and locations have been able to secure high occupancy levels. The only point of difference with industrial realty leasing trends is that these offices also command a steep premium over the market average.

It was last summer that the first signs of a slackening in demand started to show up in the local industrial space. But it was felt that it would pick up once the summer slowdown was over with.

According to Cluttons, that’s not how things have panned out since.

“Demand in Dubai’s industrial market has eased in recent months, prolonging a trend that first began late last summer. Global economic anxiety and a growth slowdown in regional markets has curtailed activity in the sector that has been amongst the most resilient in the emirate over the last two years.

“This has resulted in capital-value corrections in most sub-markets, in Jafza for instance, certain stock has seen price drops of up to 20 per cent over the course of 2016.”

But it does say that in established locations, average Class A rents have “demonstrated greater stability, with eight of the 12 sub-markets we track registering no change in 2016. In general, however, values are still perceived to be lean, with some opportunistic purchasers making acquisitions in more secondary sub-markets.”

Both of the city’s more recent mega industrial realty developments, Dubai Industrial Park and Dubai Wholesale City, have been generating significant build-up, in terms of signing up new tenants or seeing the initial projects commissioned. Consumer goods giant Unilever oversaw the opening of a brand new plant in December.

But specialist funds in the region have been eyeing possibilities in industrial property, especially those with committed leases in place.

More are on the way.

“Despite the sluggish conditions, we continue to record an interest from international occupiers trying to gain a foothold in the market as they still view Dubai as the primary gateway to the Middle East and Africa,” Cluttons reports. In particular, logistics and distribution centres remain popular amongst retailers and food and beverage occupiers.

“To an extent, logistics & distribution has compensated for weakness in other industrial sub-sectors — such as manufacturing, heavy metals and oil and gas. Build-to-suit facilities have also remained popular amongst cost-conscious developers and occupiers, particularly those unable to locate and secure large amounts of space. Carrefour recently opted for the construction of a 800,000 square feet built-to-suit premises, with Landmark, Mohebi and Aramex also constructing big-box distribution hubs.”