Big squeeze: Dubai’s office market reaches new peak

Nigel Young/Foster + Partners

The emirate of Dubai is witnessing a strong squeeze in good quality Grade A office space, with no signs of relief in the short to medium term.

The pace at which we’ve seen office space snapped up over the last 12-24 months is unparalleled. This is new territory for regional and multinational tenants alike.

With schemes such as ICD Brookfield Place, DWTC One Central and DMCC Uptown Tower all reaching major milestones of being fully leased over the last 12 months, this has had a huge impact on potential relocation options for our corporate clients.

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After all, not too long ago, the Dubai market was wrestling with oversupply issues, plummeting rental rates and extensive lease incentives being offered by landlords in order to capture strong covenant tenants within their portfolios.

Desperation was particularly evident with private landlords, who rushed to fill their vacant space, offering rents as low as AED 40 for 60 per square foot per annum.

These times already feel like a distant memory with bullish landlords significantly rolling back incentives and flexibility within post-pandemic leases.

Despite this aggressive approach, tenants are snapping up available space within record time, often not even undertaking the necessary due diligence. Tenants are expected to sign offers and leases in time periods that they simply aren’t comfortable with as landlords adopt a first come, first served approach.

While occupancy levels are high across institutional grade assets, currently at 92.4 percent, there is still sufficient space in the market to place our corporate clients. However, this availability is reducing week by week and the bigger challenge is now just around the corner, as we’re likely to be facing serious supply shortages in 2024 and onwards. 

With only about 1.4 million square feet of office supply scheduled to be brought online in the Dubai market in the next three years or so, this simply won’t be enough to cater to current demand. 

As it stands, there are a handful of schemes across the Dubai market that are able to offer a large quantum of Grade A office space and, unsurprisingly, this hails from large institutional developers who understand the market dynamics and cycles in which Dubai operates. 

Expo City and Dubai Commercity are two great examples of schemes that either have existing or upcoming vacancy in line with their development plans. Both are high profile and offer tenants a low-rise campus feel with a plethora of amenities. This type of product is currently proving very popular.

Sub-lease space may be the answer

So, what does this mean for companies looking to upgrade their premises or seek new office accommodation over the next two to three years until the next significant wave of supply is delivered? 

This may be a challenging question to answer, yet it’s not all doom and gloom.

We envisage a healthy amount of churn across the large institutional assets, providing companies with options, albeit limited, to relocate or consolidate. With high occupancy levels likely to remain for the foreseeable future, this will have a knock-on impact on rental rates, with landlords all too aware of the supply-demand balance as it currently stands. 

Average rents within the prime and Grade A segments have reached AED 249 and AED 178 per square foot per annum respectively – more than double 2019 levels – showing significant growth across the market in the last few years.

Nevertheless, while we are seeing sharp increases in rents in Dubai, its prime rents still sit comfortably below other international hub cities.

As of the third quarter in 2023, average Dubai prime rents stood at $68.7 per square foot, while in the likes of London City, London West End and Singapore, the comparable figures were $90.1, $170.4 and $106.7.

Given these substantial discounts in a global context, Dubai’s office offering is more than competitive on a global level.

We also expect to see an influx of sub-lease space being introduced to the market over the course of the next 12-24 months. This will come primarily from multinational and regional corporates who have surplus space within their office portfolios and who are committed to long-term leases and subsequently need to find alternative solutions to cover their occupancy costs. 

In summary, there are challenging times ahead for companies seeking good quality space. Available space will be sparse and expensive.

However, opportunities are likely to arise in this dynamic market – as they always seem to do in Dubai.

Companies will need to remain extremely agile if they’re to benefit from these opportunities, something that many find challenging in the current global climate.

Anthony Spary is head of office investor leasing and retail, CBRE Middle East