Office rents in the UAE’s two largest business hubs – Dubai and Abu Dhabi – remain resilient, however demand for Grade A office space is continuing to rise, along with occupancy levels, according to the latest analysis by global real estate consultancy, Knight Frank.

 

According to Knight Frank’s research, despite rising demand, the volume of new supply remains limited.

 

"With 265,000 sq ft of new office requirements during Q3, our data shows that Dubai has seen 739,000 sq ft of new office demand so far this year and is on track to surpass the 1.1 million sq ft of requirements we registered in 2021," remarked Faisal Durrani, Partner and Head of Middle East Research.

 

"The biggest challenge for the market is however a shortage of prime Grade A space. With just 2.9 million sq ft due to complete between now and 2025 and with Grade A occupancy levels hovering at around 90% on average - even higher for some of the most sought-after buildings - occupiers entering the market or looking to expand are faced with a very limited number of options," noted Durrani.

 

Excluding confidential requirements, Knight Frank pointed out that business services' tenants were responsible for the bulk of Dubai’s new office demand, together accounting for 97,000 sq ft of space requirements during Q3. 

 

According to the expert, Barsha Heights (31,000 sq ft), Business Bay (27,000 sq ft), JLT (28,000 sq ft) and Sheikh Zayed Road (22,000 sq ft) lead area specific office demand.

 

"There is a distinct trend of a flight to quality that has bedded in, with occupiers migrating away from older buildings into more modern builds that are well managed and maintained and many international businesses are looking for space with ESG credentials," remarked Andrew Love, Partner (Head of Occupier-Landlord Strategy and Solutions) and Middle East Capital Markets said.

 

"Such buildings are more likely to be found in newer part of the city, and so it is perhaps unsurprising that submarkets with higher concentrations of new, or relatively modern, stock have seen rents sail past pre-pandemic levels," he added.

 

Durrani said: "What’s more, with requirements firmly centred on best-in-class buildings, office lease rates for the best buildings are going to continue rising."

 

"Grade B, or older more secondary stock will however likely continue to struggle, with the gap between rental performance in the long established two-tiered office market likely to widen further," he added.

 

According to Knight Frank’s research, despite rising demand, the volume of new supply remains limited.

 

Love added, “Our forecasts are for 2.9 million square feet to be delivered by the end of 2025, with District 2020 and Uptown Tower T2 accounting for the bulk of new space. District 2020 (formerly Expo 2020 site) in Dubai South, being developed by Dubai Holding is the largest single development of commercial office space planned for the city and is expected to be completed in 2023”.

 

The severity of the shortage of new office space, combined with rising demand, particularly for high-quality offices suggests that office rents will continue to experience upward pressure, especially with Grade A occupancy levels running in the high 80’s to low 90’s per cent, or even higher for some of the newer Grade A buildings in the city.

 

On Abu Dhabi's scenario, Knight Frank said the office rents in all the main submarkets tracked by the real estate consultancy remained stable during Q3.

 

"In Abu Dhabi, confidence amongst businesses is rising due to the improved domestic economic environment, a rise in tourist numbers as well as the recent easing of Covid-19 restrictions," remarked David Crook, Partner - Head of Abu Dhabi. 

 

"Capital Centre has outpaced the rest of the city, with average rents climbing by 4.9% over the course of the last 12 months, taking them to AED1,400 per sq m. The biggest challenge for the market is the shortage of Grade A space," he noted.

 

"In fact, locations like ADGM, along with the some of the city’s best buildings, occupancy levels are running at 95%, highlighting the challenge new entrants, or those looking to expand face," he pointed out.

 

The steady office demand is in part linked to the stability in rents, which are now up to 15.4% higher than in 2020 (Corniche/Downtown), or 6.3% and 4.3% in the case of Capital Centre and Al Reem Island respectively.

 

Durrani said: "What we’re seeing is a widespread return of employees to offices and business confidence is rising in tandem. Businesses feel good about life right now, as this is reflected in the non-oil sector PMI readings - and demand for office space is rising across the board."

 

"However, like Dubai, the Abu Dhabi office market continues to face an insufficient supply of good quality fitted space in well managed buildings," noted Durrani.

 

According to Knight Frank’s research, most office space requirements in Abu Dhabi are driven by the education and media sectors. In fact, these two sectors account for 51% of the 18,000 sqm of new office demand registered so far this year.

 

Furthermore, the flexibility of serviced offices remains a key characteristic for newly entrants to the market as well as start-ups. There is a demand for flexible offices in branded serviced offices, which has led to existing operators looking for opportunities to expand and tenants preferring shorter leases, it added.-TradeArabia News Service