Dubai’s office sector has come under pressure against a backdrop of macroeconomic challenges that have prompted many companies to adopt a conservative approach to new leasing. Last year average rents fell by 3 per cent year-on-year, while average sales dropped 5 per cent, reports Asteco.
“The continued macroeconomic uncertainty is undoubtedly having an impact on all elements of property,” says John Stevens, managing director of Asteco. “Enquiry levels for large units were particularly low as market sentiment is discouraging many companies from expanding or for new entries coming into the market.”
From a sales perspective, Stevens says average office prices continued a downward trend, declining by 2 per cent in the fourth quarter last year and 5 per cent annually. “Demand is [coming] from small businesses for piecemeal offices of sizes below 18.5 sq m,” says Stevens.
Overall, there was low uptake of new office space in Dubai last year.
According to a JLL report, the total amount of occupied office space in Dubai increased by around 240,000 sq m last year, which is about 30 per cent below the average absorption of the previous five years. “This reflects not only the lower activity of the oil and gas sector, but also regional and global economic uncertainties, which have delayed the leasing decisions of some global companies,” says Dana Williamson, head of tenant representation and corporate solutions at JLL Middle East and North Africa.
She says the finance and banking sector has seen some expansion, but most of the new deals have been relatively small. “The strongest of the traditional office sectors last year had been media and IT, but we have also seen growth in interest in office space from manufacturing and logistics companies, and we expect this trend to continue into 2017.”
According to Cluttons’ Dubai Bulletin, most sub-markets of Dubai registered decreases in upper-limit rental rates, with Garhoud (Dh90 per square foot) ending the year 18.2 per cent down, while Al Barsha (down 10 per cent) and Deira (down 9.1 per cent) were the next weakest performers. On the other hand, Dubai International Financial Centre (DIFC) registered a rental growth of 5.7 per cent in the upper limit last year.
Murray Strang, head of Cluttons Dubai, says, “Definitely, 2016 was a relatively subdued year for the Dubai office market. A number of global economic issues were key in dampening business growth and appetite for investing into office premises.”
Strang says rents have generally fallen in most areas, but there are locations like DIFC where the rents continue to strengthen due to limited new supply. “Conversely, however, there are other locations such as Business Bay where in the last 12-24 months the market has seen a huge amount of new supply and landlords struggling to attract tenants ahead of considerable local competition,” explains Strang.
He adds that rents have also come down in Jumeirah Lakes Towers (JLT) at the southern end of town. “JLT has struggled because there have been some sizeable new buildings such as Mazaya Business Avenue and a few others with multiple strata ownership structures, which were handed over in the last year or two and have launched considerable new vacant space onto the market,” says Strang. “As a result, neighbouring buildings and landlords have had to drop their rents to be competitive and secure tenants.”
On the flip side, he says in nearby Dubai Internet City and Dubai Media City, the level of supply is far more limited, and as such demand is sustained and rents have maintained a strong level.
Best-performing sector
The most active sectors identified by market observers continued to be finance and media-related organisations in DIFC and Media City respectively.
Cluttons’ reports that the technology, media and telecoms (TMT) sector is among the most active in Dubai, thanks to the government’s innovative drive and desire to position the city as a leading tech hub.
“The rising star in the office occupier market is certainly the TMT sector and Internet City and Media City remain the core focus of this rapidly expanding and ever-important sector for Dubai’s economy,” says Faisal Durrani, head of research at Cluttons. “The government’s recent Future-Accelerators Programme is paving the way for further strong expansion in this area over the short term.”
However, he adds that with limited space available in high-demand locations, interest is likely to rise in complementary free zones such as Dubai Science Park.
While the media and IT sectors are likely to expand further over the next few years, Williamson says there is some space available to accommodate this growth in popular locations such as Tecom (Internet and Media City). “Tecom has a major project [Innovation Hub] under construction, which will provide high-quality office space for both single tenants and multi-tenanted buildings over the next five years,” says Williamson. “In combination with some smaller new developments planned in the Internet and Media zones, the Innovation Hub is likely to satisfy potential demand.”
Knight Frank says the fourth quarter was the best-performing quartile last year, on the back of marginally increased occupier sentiment. Matthew Reason, commercial leasing surveyor at Knight Frank, says, “[In light of difficult conditions last year], landlords started to offer greater incentives and increased their flexibility as the market dynamic shifted to an occupier market.”
Knight Frank identified many non-free zone locations where rents decreased, including Business Bay and Shaikh Zayed Road, although rents in key free zones remained strong. “Areas that saw the greatest performance during the year continued to be in Tecom [Barsha Heights], namely Dubai Internet City and Media City, and DIFC. The performance of areas such as Dubai Design District declined as their rents increased substantially on the back of stronger occupancy levels, while occupancy of strata-owned assets in Business Bay continued to dwindle,” says Reason.
In Dubai, demand for rental units remains focused on better-quality buildings and the market has seen a continuation of the “flight to quality” in recent years. While all tenants are price sensitive, Williamson says the differential in rentals between popular buildings and the less-preferred ones has widened in the Dubai market. Average deal size is small to medium, between 500 sq m and 1,000 sq m, with some larger deals of up to 10,000 sq m.
The strongest demand, however, has been for single-owned buildings, with many tenants remaining wary of taking space in strata-titled space where they may have to negotiate with multiple landlords. In terms of location, Williamson says the central business district (CBD), from the Dubai World Trade Centre to Downtown Dubai, and the popular free zones remain in favour. “Vacancies in existing space in the CBD fell to 15 per cent last year, its lowest level since before the global financial crisis in 2008-09,” she points out.
Outlook 2017
Industry experts don’t expect significant rental growth this year, as the overall economy remains relatively flat and there is sufficient new supply to accommodate expansion plans of most companies. Head count numbers of businesses is expected to remain stable this year, while others may grow but to a lesser extent compared with the forecast a few years ago.
“We expect to see both office rental rates and sales prices to continue to come under pressure as new developments are handed over,” says Stevens. “Demand, however, is expected to remain low. Similarly, both tenants and buyers will expect attractive rates, incentives and flexible payment terms.”
JLL estimates supply levels this year to remain relatively modest, with just 300,000 sq m of new space scheduled to enter the market. This represents less than 4 per cent of the total market of 8.5 million sq m. “With supply levels remaining modest into 2018, with only 85,000 sq m currently scheduled for delivery, the market is not expected to see an increase in oversupply of office space over the next few years,” says Williamson.
As with last year, she expects the market to remain polarised between relatively small leases and build-to-suit activity to satisfy larger requirements.
However, Knight Frank expects the Dubai commercial office market to record a slight improvement this year. Last year, Knight Frank reported that occupiers concerned with market stability put their commercial office searches on hold and extended for 6-12 months to re-evaluate the situation in the new financial year.
“With stabilised oil prices and continued government investment, occupier sentiment has improved and [businesses] have since resumed their office searches, capitalising on the reduced office rents and greater incentives offered by landlords,” explains Reason.
Knight Frank expects a large amount of stock next year, with projects such as ICD Brookfield, Gate Village 11, One Central and HSBC Headquarters coming online, which will be a welcome addition to Dubai’s limited grade A space. Meanwhile, a large quantity of new projects in Al Manara (Jumeirah side) has recently been delivered or is due for delivery in the second quarter.
“The single-owned office buildings offer tenants reasonable quality office accommodation, however the fierce competition between the neighbouring developments is likely to push the gap between asking rates and achievable rates further, with asking prices up to a third higher than achieved rates,” says Reason.
