Dubai: Landlords in Dubai holding Grade B office rental properties could be in for a bit of a squeeze. For the first time in 10 years, supply of prime office space is to exceed that of relatively inferior options, according to data from Core Savills.

Occupier demand is following those imminent Grade A office lettings. “Developers have recognised the need for quality office space where demand has consistently exceeded available supply in the past,” said David Godchaux, CEO at the consultancy. “Developers and free zone authorities have been responding to the growing demand for Grade A stock and this trend is expected to amplify through 2017-19.”

More than 70 per cent of office-related projects — those ongoing and announced — up to 2019 fall within the Grade A parameters. And in the first three months of this year, actual completions have been quite healthy, with 1.6 million square feet added to Dubai’s existing office capacity base. Major developments being handed over were The Onyx 1 and 2 in The Greens, and the Tamani Arts Tower in Business Bay.

For the rest of the year another 1.4 million square feet can be expected, including One Central’s Offices 2 and 3 (in Dubai World Trade Centre district) spanning 745,000 square feet.

All of this come with consequences for landlords with properties further down on the value chain. And even for those with currently let properties, who could see their tenants move out at the first opportunity to new and better equipped addresses.

According to Core Savills estimates, Dubai’s stock of Grade B and C offices represent 71 per cent — 67 million square feet — of the total 94 million square feet. This category has already been seeing higher vacancy levels, of above 30 per cent on average, in the last five years.

Even the most optimistic projections, “we estimate that it will take over three years for the total secondary vacant stock to be absorbed,” the report states. “We still expect a significant lag in absorption for the existing vacant stock.

“For this reason, we are very cautious about any chance rising rents moving upward again in the next 12-18 months.”

Strong demand

More of new plush offices will also mean that older and poorer quality stock will have less leeway in their asking rents. With each new Grade A office building nearing completion, there will be more pressure piled on the rest.

The Core Savills report notes that the upcoming 150,000 square feet “The Exchange” in Gate Village 11 is fully pre-leased, “indicative of the strong demand for prime office space in this (DIFC) district.

As has been the case in recent years, Dubai Media City, Dubai Internet City and Dubai Knowledge Park retain their high occupancy levels. “We expect strong demand for the upcoming Innovation Hub, a business cluster of communications and technology facilities spanning 1.8 million square feet, strategically located in the heart of the area.” (The first phase of 350,000 square feet is to be delivered by the end of 2018.) “We foresee many tenants, reaching the end of their long-term lease agreements, to look for newer premises or purpose-built facilities within this district, or to migrate to upcoming free zones — albeit, many being developed by the same master entity,” the report adds.

Higher end

According to market sources, institutional funds/investors scouring for opportunities within the commercial real estate space could pick up office assets. To date, they have largely confined their purchases to industrial and logistics assets in and around the Expo 2020 venue site.

So, where should investors be looking? There is Business Bay — “the leading strata-driven office district” — has been making gains in occupancy, “from the initial low of 55 per cent to 63 per cent over the last year”.

The report says that landlords with properties at the higher end have adjusted their rents to realistic levels, “while more affordable units have been readily absorbed leading to a consolidation in headline rental range”. (But more upcoming supply in the neighbourhood — estimated at more than 1 million square feet — could put downward pressure on average occupancy levels and rents.) JLT’s office towers has been holding the line on rentals, with lower grade properties holding at Dh60 a square foot in recent quarters.

 

 

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It’s going to be Grade A all the way

 

Next year will see One Central’s remaining offices 4 and 5, phase 1 of the Innovation Hub (part of the Tecom cluster) along with Amesco Tower in JLT are likely to be handed over, topping nearly 1.8 million square feet.

Other significant new capacities are Dubai Design District’s (d3) phase 2 and the massive ICD Brookfield Place in DIFC, on course for a 2019 handover.

As d3 has clearly shown, it is not the case that only high-rises work in generating tenant demand. Locations either side of Shaikh Zayed Road (from the first to the third interchange) are seeing a consistent delivery of low-rise offices with increasing tenant interest, says Core Savills. This is particularly from “clients with higher spatial requirements as they provide large single floor plates, stand-alone buildings, higher visibility and access,” the report adds.