Dubai preps office projects to ease supply squeeze

ICD Brookfield

• Grade A occupancy is at the highest level since 2015, says JLL
• Most of the space set for completion in 2023 and 2024 is pre-leased
• Dubai’s D33 strategy aims to double foreign trade and investment
• New towers, expansions and revamps of grade B offices are planned

Dubai needs a fresh wave of office development, analysts have said, to plug a shortage of prime space that could hinder the government’s efforts to attract more companies to the UAE. 

“The big story in Dubai’s office market is the shortage of grade A office space,” said Faisal Durrani, head of Middle East research at consultancy Knight Frank.

“With occupancy levels hovering at around 90 percent for the city’s grade A buildings, occupiers entering the market today will find a very limited range of high-quality options.”

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A multinational company looking for 20,000 sq ft in a prime location such as the Dubai International Financial Centre (DIFC) would “struggle to find even 3,000 sq ft”, according to Ahmed Abou El Naga, head of institutional sales at property agency Metropolitan Group.

“Dubai is really lacking grade A office space. There is hardly anything out there that isn’t tenanted.” 

Around 2 million sq ft of commercial stock is due to be delivered over 2023 and 2024, according to consultancy Core. Prominent handovers include Uptown Tower in Jumeirah Lakes Towers, the office components of One Za’abeel and 6 Falak, and the planned expansions of free zones such as Tecom’s Innovation Hub and Dubai Multi Commodities Centre. 

New developments are in the works too, including the next phases of Expo City (the legacy site of Expo 2020 Dubai) and Dubai CommerCity at the Dubai airport free zone.

Updates are also expected from ICD Brookfield, the joint venture between Dubai’s sovereign wealth fund and a Canadian asset manager, which has delivered the 1.1 million sq ft ICD Brookfield Place in the DIFC. The venture is set to announce new lettings soon. 

Most of the immediate supply pipeline is pre-leased, however, so there will be limited availability on delivery, said Core’s head of agency Robert Thomas.

“While free zones such as Dubai South, the Expo district and outer Tecom clusters have some existing office inventory, central locations [including Downtown Dubai and Business Bay] are short on supply.”

He added: “Many landlords and free zones are activating new office projects or upgrading or repurposing existing office stock.”

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Ben Johnston, director of offices and business space leasing at JLL Mena, also pointed to the “limited pipeline of new deliveries”.

“If demand for office space continues to be strong, it is expected to further increase pressure on availability of grade A space in highly sought-after areas,” Johnston added.

“We are seeing strong appetite from developers to initiate new projects and a lot of free zones have further development phases that can be initiated.”

There is also an opportunity for owners of grade B assets to capture demand spill-over by upgrading their space, according to JLL.

Under the $8.7 trillion D33 economic plan, Dubai aims to double foreign trade and investment in the next decade and become the fourth global financial centre. The office shortage must be tackled if it is to attract incoming and expanding firms, industry watchers have agreed. 

Many of the reasons for the squeeze are positive: a surge in demand post-pandemic as employees return to their desks and economic recovery driven by high oil prices. 

Double-digit increases in rents

Dubai office rents recorded double-digit growth in 2022 following a prolonged downturn. JLL’s UAE Market Overview 2022 found that grade A office rents in Dubai’s central business district increased by 21 percent year-on-year in the fourth quarter. The average price per square metre reached AED2,100 – a level not seen since 2015. 

In the DIFC, average prime rents outperformed the market, exceeding AED2,900 per square metre. This pushed the hub to 16th place in JLL’s Global Premium Office Rent Tracker, from 36th in 2021. 

Prime vacancy rates fell to 11 percent, from 19 percent at the end of 2021, while total office stock rose by 300,000 sq ft to 9.1 million sq ft in 2022.

The number of new Ejari (lease) registrations rose 71.3 percent annually to 71,325 in 2022, according to CBRE’s Q4 2022 market review, which said prime office rents increased by 25.2 percent last year.

Downtown Dubai, Sheikh Zayed Road (Dubai World Trade Centre to Dubai Mall), and Jumeirah Lakes Towers reported the sharpest rental increases – around 50 percent – according to Core. 

Who's looking for office space – and what do they need?

The most in-demand office size is between 1,000 sq ft and 2,000 sq ft, according to Thomas. Core has also identified a shift in sectoral demand, away from fintech and crypto firms towards traditional banking, finance and service industries, followed by IT and commodity firms. 

Paula Walshe, Middle East director of transactional services at estate agency Savills, underlined the needs of "new companies coming to Dubai that require office space in order to complete their trade licence process”.

She added: “At DIFC, Dubai Internet City and Dubai Media City, business centres and ‘plug and play’ spaces are in high demand and short supply. They are favoured by new entrants with limited capex to fit out their space and who need flexibility as they grow in a new market.” 

The aligning of Dubai’s regulatory frameworks with international standards is encouraging asset and capital managers to establish regional hubs, according to Simon Townsend, managing director of real estate and investments at CEG Invest.

He also pointed to the emirate's startup incubators as a driver of demand, with companies looking for their own premises as they grow.

While the under-supply of large floorplates "could be seen as a potential bump" in Dubai's short-term growth, Townsend said the DIFC 2.0 strategy, which aims to triple the size of the free zone, was one project that would "relieve some of the pressure" and help keep the D33 targets in sight.