UAE offices filling up as research says more prime space needed

November 28, 2022, 2:09 PM

Business Bay is one of Dubai's most in-demand areas for office space

Demand for Grade A space is rising fast in Dubai and Abu Dhabi
Occupancy is above 90% in the most sought-after buildings
2.9m sq ft of new offices are due by 2025 but might not be enough

The return of employees to the workplace and rising business confidence are driving up demand for top-quality office space across Dubai and Abu Dhabi, according to new research.

“Businesses feel good about life right now and demand for office space is rising across the board,” said Faisal Durrani, partner and head of Middle East research at Knight Frank.

As occupancy levels and rents increase, however, analysts are warning about a shortage of Grade A office space in the UAE’s two largest business hubs.

Durrani added: “Like Dubai, the Abu Dhabi office market continues to face an insufficient supply of good-quality fitted space in well managed buildings.”

Taimur Khan, head of Mena research at property group CBRE, said: “Given the lack of availability of stock and heightened demand levels, we expect rental growth to remain relatively strong over the remainder of the year, with the prime and Grade A segments of the market expected to outperform.“

Knight Frank’s third-quarter report identified 265,000 sq ft of new office requirements in Dubai, bringing the total for the year so far to 739,000 sq ft. The emirate is on track to surpass the 1.1 million sq ft of requirements registered in 2021.

Durrani added: “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 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.”

Knight Frank’s Q3 report found that Barsha Heights, Business Bay, Jumeirah Lakes Towers and Sheikh Zayed Road were the most in-demand areas for office space in the city.

Andrew Love, a partner, head of occupier-landlord strategy and solutions and head of Middle East capital markets at Knight Frank, said the market was seeing a flight to quality.

Occupiers are migrating from older buildings into more modern builds that are well managed and maintained, Love explained, and many international businesses are looking for space with good environmental, social and governance credentials.

“Such buildings are more likely to be found in newer parts 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 said.

Office lease rates for the best buildings are set to continue rising, according to Durrani, while Grade B or older stock will likely continue to struggle. The gap between rental performance in the two tiers of the office market is forecast to widen.

District 2020 and Uptown Tower T2 account for the bulk of the 2.9 million sq ft of new space due to be delivered by the end of 2025, according to Knight Frank.

The former Expo 2020 site in Dubai South is being developed by Dubai Holding and is the largest single development of commercial office space planned for the city. It is set for completion in 2023.

In Abu Dhabi, business confidence is rising thanks to the improved domestic economy, an increase in tourist numbers and the easing of Covid-19 restrictions. Office rents in all the main submarkets tracked by Knight Frank have remained stable during Q3.

David Crook, partner and Abu Dhabi head at the consultancy, also pointed to the “shortage of Grade A space”, adding: “In locations like ADGM, along with some of the city’s best buildings, occupancy levels are running at 95 percent – highlighting the challenge new entrants or those looking to expand face.”

He added that the steady office demand was linked to the stability in rents, which are now up to 15.4 percent higher than in 2020.

Most office space requirements in Abu Dhabi are driven by the education and media sectors, according to Knight Frank. The two sectors account for 51 percent of the 18,000 sq m of new office demand registered so far this year. There is also a demand for flexible space in branded serviced offices, which has led to existing operators looking for opportunities to expand and tenants preferring shorter leases.

CBRE’s Khan said demand had increased market-wide in the UAE, with all Abu Dhabi’s office rents rising by up to 5.5 percent in the year to Q3. In Dubai, rental growth of up to 16.5 percent has been recorded over the same period.

“There is little doubt that we will see weakening global macroeconomic conditions impact economic activity in the UAE. However, the UAE’s fiscal position, easing of business and residency regulations over the course of the year and safe-haven status are expected to dampen the scale of the impact,” he added.