Stock Dubai skyline
Dubai's office landlords will need to double up on incentives as a combination of COVID-19 and extra supply pressure rentals. Image Credit: Antonin Kelian Kallouche/Gulf News

Dubai: This could be the best time for businesses in Dubai to look at rental options – more landlords are willing to offer up to 12-month rent-free for leases locked in for five years. If need be, landlords will also help fund fitting out the offices.

All these are marked changes in Dubai’s commercial real estate space, according to Core, the property consultancy. Quite a few new office buildings are recording vacancy rates of 40-50 per cent, as the wider economy forces likely tenants to rethink about relocation. At a time when saving costs are front and centre of business priorities, managing rental costs is one key element of this.

Where have rents dropped most?

Older buildings in the city’s more established commercial districts are the ones under intense pressure. Right after COVID-19 hit, these tenants had been chasing landlords for rent waivers, or failing that, deferments. Where landlords have not been willing to comply, businesses have just upped and left.

“Deira, Bur Dubai and Garhoud have seen the sharpest drops with average rents falling over 20-25 per cent year-on-year as many tenants migrated to newer locations,” says the Core report. “Other strata districts such Barsha Heights, Busines Bay and JLT continue to face challenges, displaying a steep 20 per cent year-on-year drop in average rentals.”

Incidentally, JLT (Jumeirah Lake Towers) and Business Bay are also the most in-demand spots for offices, according to Prathyusha Gurappu, Head of Research at Core. “Average JLT rents start from Dh60-Dh65 per square foot, and it’s more or less the same at Business Bay too.”

10%

The drop in office occupancy levels in Bur Dubai, Garhoud and Deira during 2020 as more businesses migrated to Shaikh Zayed Road or JLT

Competition from WFH

More businesses in the UAE are open to hybrid work models, whereby facets of the work-from-home will continue even when the COVID-19 pandemic is consigned to history. But in the near term, it will continue to have some sort of influence in the local office rental space.

Vacancy worries

Landlords will need to focus their attention on this grim detail – currency vacant office stock is at about 24 per cent. That is, about 25.2 million square feet out of 104.9 square feet is in need of a tenant. Those landlords who can offer competitive rates and “socially responsible” office spacing needs will be better off in an extremely fluid situation for commercial leasing.

“We have seen a polarizing performance amongst Grade A and Grade B areas with most of the market witnessing a flight to quality with Grade A areas typically witnessing resilience in both occupancy levels and rental drops,” says the Core report.

And more Grade A stock is coming… and winning tenants. All through 2020, Grade A office addresses recorded a 22 per cent increase.

Choice spot

Nothing exemplifies this better than the recently opened ICD Brookfield high-rise at DIFC, which this week announced that 11 new tenants have come on board for a combined 72,000 square feet. They include Dubai Aerospace Enterprise (DAE) and Swiss banking giant UBS.

“We have seen a growing interest amongst tenants for healthier buildings that enable them to maintain a competitive edge through their workplace environment,” said Rob Devereux, CEO of ICD Brookfield, which, incidentally, is the tallest ‘Platinum-certified’ office tower across Europe, the Middle East and Africa. All of 53 storeys, its height reaches up to 282 metres.

ICD Brookfield Place
The ICD Brookfield keeps picking up more blue-chip tenants, further confirming demand patterns for Grade A addresses. Image Credit: Supplied

Demand is there…

But it’s highly selective. There are enquiries happening from “large local or regional occupiers as they gradually phase back staff into physical offices,” the Core market update notes.

“The preference for fully fitted and partitioned offices or Category-A finishes (finished ceiling and raised flooring) remains strong, while shell-and-core stock has seen limited movement as potential tenants are hesitant to invest in fit-outs and require immediate occupancy. “This decision driver has led well-priced, maintained, fully fitted units to witness good absorption, particularly in Business Bay and JLT.”

Relaxing seating densities, and collaborative spaces are likely to be a more permanent feature in a post-COVID office environment. This will mean more meeting rooms, more video/VR space, and more space dedicated to green space as well as health and wellbeing

- Dana Salbak, Head of Research at JLL MENA