RIYADH: As demand for quality office space continues to grow in the Middle East region, the UAE’s two major business hubs – Dubai and Abu Dhabi – are expected to witness rental rates moving northwards amid the occupiers’ push for "flight to quality", according to global real estate consultancy Knight Frank.
While overall office rents have been resilient in Dubai and Abu Dhabi, the demand for Grade A office space is continuing to rise amid strong occupancy levels as new supply remains limited, analysis from the firm suggests.
Dubai alone had a requirement of 265,000 square feet of new office space during the third quarter of this year, with the Knight Frank data showing that the city has seen 739,000 sq. ft of new office demand so far this year.
With this trend continuing, the property consultant expects Dubai to surpass the 1.1 million sq. ft of requirements it registered in 2021.
Faisal Durrani, partner – head of Middle East Research at Knight Frank, pointed out that the biggest challenge for the market is a shortage of prime Grade A space.
“With just 2.9 million square feet due to complete between now and 2025 and with Grade A occupancy levels hovering at around 90 percent 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,” he said.
Knight Frank's research found out that business services tenants are responsible for the bulk of Dubai’s new office new demand, together accounting for 97,000 sq. ft of space requirements during the third quarter. The top demand drivers are 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).
“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,” said Andrew Love, partner – head of Occupier-Landlord Strategy and Solutions and head of Middle East Capital Markets at Knight Frank.
Despite rising demand, Knight Frank said the volume of new supply remains limited, with around 2.9 million sq. ft to be delivered by the end of 2025. This would include District 2020 and Uptown Tower T2 accounting for the bulk of new space.
It noted that 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 in Dubai.
In Abu Dhabi, Knight Frank research showed that Capital Centre has outpaced the rest of the city, with average rents climbing by 4.9 percent over the course of the last 12 months, taking them to 1,400 dirhams ($381) per sq.m.
This comes when Saudi Arabia's capital city Riyadh is also seeing an increasing demand for prime office space as its Grade A office occupancy levels rose by 4 percent year-on-year to reach 98 percent.
This would translate into office lease rates continuing to climb in the wake of growing demand.
The average lease rates for prime office space in Riyadh have increased by 18 percent over the past 12 months to SR1,775 ($472) per sq. m, according to Knight Frank.
Meanwhile, Jeddah’s office market is also experiencing a “resurgence” in requirements as multinational and domestic businesses ramp up their presence in Saudi Arabia’s second-largest city.