Office towers in Business Bay
Office towers in Business Bay. The only exception to the gloom is at the premium end of the office property market. Image Credit: Virendra Saklani/Gulf News

Dubai: Rental pressures are getting to even Grade A offices in Dubai, with the first quarter seeing average leases rates dropping 3.3 per cent from a year ago. That is on top of a 5.1 per cent dip all through last year, and could get much worse as new supply force landlords to renegotiate even more favourable terms for tenants.

That means some landlords are even willing to go as far as offering rent-free periods even for existing tenants. “Rent-free periods, both to existing and new tenants, are becoming a more common practice,” says a new report by Knight Frank, the consultancy. “Landlords are willing to concede longer rent-free periods and offer contributions to other costs to occupiers willing to sign longer term leases, a practice being received very favourably by global occupiers.”

Landlords with Grade A office holdings need to get just as generous, if they want to retain their leases and not be swept aside by newer office buildings. “A material portion of new supply due to enter the market over the short- to medium-term falls within this category,” according to the latest update from Knight Frank.

The only exception to the gloom is at the premium end of the office property market, where units now lease at around Dh240 a square foot. “Vacancy in this sector has remained relatively low compared to the wider market, even to the point where some periphery assets have seen declines in vacancy,” the report adds.

“Much of this flight to quality has originated from tenants who have previously occupied Grade A offices.”

But the real pain is being felt by office buildings lower down the value chain. And strata-owned buildings (where multiple landlords own units and then lease out) were the worst hit, recording declines of 20 per cent in the 12 months to end March, according to the report.

Lack of demand is the main reason why the office rental market continues to pass through a severe downturn. “This has meant that pressure on rents has been sustained over this time period, leading to further softening in the market,” the report says. “Take-up activity remains limited from new occupiers with new licence issuances falling by 2.7 per cent in 2018.

“Renewal of existing licences remained relatively flat with only a 0.1 per cent increase witnessed in 2018. Finally, cancellations of licences increased by 22.4 per cent over the same time period.”

But even with all the options in a tough market, tenants by and large are sticking to the same locations even if they decide on another building in the neighbourhood. “They are not willing to relocate to secondary locations in order to reduce costs, particularly given the inherent licencing limitations these locations have.”

Tenants fixated on keeping costs down
* The main source of demand for offices is from firms looking to consolidate their operations, with 75 per cent of current demand being for floor space of up to 5,000 square feet, according to Knight Frank. “Demand is also centred towards product that requires limited capital expenditure.”