There's a paradigm shift happening in Dubai's office supply

Dubai - Combination of economic market conditions, work-live-play developments are early signs of new era

Office supply in dubai is witnessing a paradigm shift with new stock of prime office space exceeding upcoming grade B and C supply for the first time in recent history.
Core Savills said in its Dubai Office Market Spotlight that a combination of economic market conditions and work-live-play developments in the pipeline are early signs of a new era.
"The secondary office market is not moving forward towards a recovery in its real estate cycle due to strong headwinds faced from the large amount of existing stock, despite marginal improvements in demand," according to the report.
"In this report, we have analysed the evolution of Dubai's office supply and arrived at the conclusion that the secondary market is unlikely to recover in the near future," said Core Savills CEO David Godchaux. "Out of a total of 94 million sqft of office space in Dubai, 71 per cent or 67 million sqft are estimated to be of grade B and C quality," said Godchaux.
This submarket has seen a lot of new supply coming over the past five years with low levels of absorption, leading to high vacancy rates, above 30 per cent on average.
"As macro-economic indicators start improving and demand for grade B and C office space starts increasing again, it will still take a lot of time for it to absorb the existing vacant stock."
Even with an optimistic hypothesis on demand, the report estimates that it will take over 1.5 years for half of the total vacant stock to be absorbed. "For this reason, we are very cautious about any chance of an upward movement in secondary market rents in the next 12-18 months," said Godchaux.
"The good news is that the office market seems to be gradually self-adjusting with new prime stock expected to exceed new grade B supply for the first time in the last 10 years. Developers have recognised the need for quality office space where demand has consistently exceeded available supply in the past, while the recent surge of grade B and C delivered stock is finally anticipated to slow down," he said.
"Developers and freezone authorities have been responding to the growing demand for grade A stock and this trend is expected to amplify through 2017-19" states the report. Core Savills observed that polarisation between prime and secondary markets continues to amplify, also reflected within individual submarkets amongst grade A and B products.
"For example, core Gate Buildings in the Dubai International Financial Centre are witnessing high occupancy while peripheral buildings face relatively slower absorption, trading at lower rents and much lower occupancy levels," it said.
 
Upcoming projects
The upcoming 150,000 sqft The Exchange in Gate Village 11 is reportedly fully pre-leased, indicative of the strong demand for prime office space in this district. Similarly, Tecom Group's Dubai Media City, Dubai Internet City and Dubai Knowledge Park are also seeing high occupancy levels, it noted.
"We expect strong demand for the upcoming Innovation Hub, a business cluster of communications and technology facilities spanning 1.8 million sqft, strategically located in the heart of the area; the first phase of 350,000 sqft is announced to be delivered by the end of 2018," it said.
According to Knight Frank, blue-chip occupiers who had put real estate decisions and plans on hold in 2016 are now planning for a more active business cycle. However, it added that any potential upside in rental values is expected to be offset by the delivery of new Grade A space in the city while rents in Grade B buildings are expected to see marginal declines over the same period. CBRE Middle East said in a report that Dubai's commercial office sector has evolved into a clear two-tiered market, with prime accommodation, particularly in the free zones, attracting strong demand. However, the secondary market continues to weaken, with a 12 per cent annualised decline in rental values brought about by a persistent oversupply of strata office product and a general softening of demand fundamentals.
The supply delivery in first quarter 2017 has been rolling, with over 1.6 million sqft of office stock coming to the market. Major developments being handed over were The Onyx 1 and 2 in The Greens, and the Tamani Arts Tower in Business Bay. The remainder pipeline for 2017 looms at 1.4 million sqft including One Central's Offices 2 and 3 spanning more than 745,000 sqft.
According to Core Savills, in 2018, One Central's remaining Offices 4 and 5, phase 1 of Innovation Hub along with Amesco Tower in JLT are expected to be handed over, topping nearly 1.8 million sq.ft altogether.
Other large developments under construction include D3 phase two and ICD Brookfield Place, expected to be delivered by 2019. "We have also noticed several upcoming mixed-use projects adjusting their asset portfolio, accommodating more residential or retail instead, marginally affecting office supply estimate," said the report.
- issacjohn@khaleejtimes.com