Demand for Grade A office space in key UAE markets rising says Knight Frank

Occupiers have been found to be migrating away from older buildings into modern builds that are well managed and maintained

Knight Frank has revealed that the demand for Grade A office space is continuing to rise, along with occupancy levels. It also revealed that office rents in the UAE’s two largest business hubs – Dubai and Abu Dhabi – remained resilient over the quarter.

“With 265,000sqft of new office requirements during Q3, our data shows that Dubai has seen 739,000sqft of new office demand so far this year, and is on track to surpass the 1.1m sqft of requirements we registered in 2021,” said Faisal Durrani, Partner – Head of Middle East Research at Knight Frank.

He added, “The biggest challenge for the market is however a shortage of prime Grade A space. With just 2.9m sqft 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.”

In early November 2022, Eshraq sells Reportage Properties 650,000sqft land plot on Al Reem Island.

The firm said that, excluding confidential requirements, business services tenants are responsible for the bulk of Dubai’s new office new demand, together accounting for 97,000sqft of space requirements during Q3. Barsha Heights (31,000sqft), Business Bay (27,000sqft), JLT (28,000sqft) and Sheikh Zayed Road (22,000sqft) lead area specific office demand, the firm elaborated.

Andrew Love, Partner – Head of Occupier-Landlord Strategy and Solutions and Head of Middle East Capital Markets added, “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. 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.”

Durrani elaborated, “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.”

In mid-November 2022, ValuStrat said that Dubai apartment values were starting to stabilise.

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

“Our forecasts are for 2.9m sqft 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 the 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,” Love stated.

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 80s to low 90s percent, or even higher for some of the newer Grade A buildings in the city, the firm revealed.

In the same month, Abu Dhabi’s Department of Municipalities and Transport (DMT) said real estate transactions in the emirate in Q3 exceeded $5.7bn.

Discussing the Abu Dhabi market, David Crook, Partner – Head of Abu Dhabi said, “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. Office rents in all the main submarkets tracked by Knight Frank have remained stable during Q3 2022.”

He continued, “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 $381 per sqm. The biggest challenge for the market is the shortage of Grade A space. 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.”

The steady office demand is said to be 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.

Late in November 2022, Betterhomes said it had purchased a full floor in a Motor City office tower.

“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,” Durrani noted.

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

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, the firm concluded.

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