Dubai’s commercial property market is gradually recovering from the negative effects of coronavirus, although overall occupancy levels remain low compared to pre-pandemic days, according to research and advisory firm Cushman & Wakefield Core.
Year-on-year Grade A office occupancy levels improved from 80 percent to 83 percent and Grade B and C office stock moved from 74 percent to 76 percent. Although still low, city-wide office occupancy levels improved from 76% to 78%, Cushman & Wakefield Core’s latest report revealed.
“While new market entrants were limited pre-pandemic, we have seen a sharp rise in first phase expansions with nearly 40% of our office enquiries coming from this segment,” said Robert Thomas, head of agency at Cushman & Wakefield Core.
“The main drivers for these regional and global occupiers entering Dubai are the city’s efficient management of Covid-19, robust infrastructure and ease of doing business. The remaining demand stems from existing occupiers who are either expanding or who had taken a wait-and-see approach over the last 12-18 months and are now looking to relocate,” he added.
Over 990,000 sq. ft. of total office space has been delivered so far in 2021 with major deliveries including the first phases of the Deira Enrichment Project by Ithra, and Dubai CommerCity, both projects witnessing steady leasing activity.
“Although the market is abuzz with smaller spatial requirements, we are seeing limited movement above the 15,000 sq. ft mark, except in select prime office buildings,” said Thomas.
“Most major occupiers are continuing to stay in existing premises, either due to competitive lease renewals executed over the last 18 months or because they are currently operating under a hybrid model and are yet to take a call on their long-term expansion and workplace strategy. We expect this segment of the market to mobilise from early 2022 as most international occupiers are expected to return to the office by next year” he explained.
While there is an oversupply in the office market, the market divergence and demand for quality trend has resulted in the absorption of most of the prime sub 5,000 sq. ft office stock available.
With an undersupply in select size and superior build-quality stock, some landlords are getting higher rentals than the area average for such units, particularly in strata office districts such as Business Bay and JLT.
On the other hand, Cushman & Wakefield Core forecasted that Grade B and shell-and-core properties, unless repurposed and fitted, will continue to face challenges in attracting occupiers and witness contraction in occupancy levels.
Single-landlords and single-owned freezones have mostly maintained headline rents over the last year and are not displaying volatility in asking rents that the strata (multiple-ownership) market is now seeing.
“The strata market is increasingly favouring landlords after being tenant-friendly for years. In certain sub-markets where demand is exceeding supply, landlords, particularly for fitted units, are pushing for higher headline rentals with transactions being closed at asking prices with fewer cheque payments,” said Thomas.
Most office districts have either seen average year-on-year rents stabilise or witness an uptick. Prominent asking rental rises were seen in DIFC (13%), Downtown Dubai (16%), Sheikh Zayed Road (Trade Centre to 1st interchange, 6%), JLT (23%) and Business Bay (15%) as most of the market activity is concentrated in these areas. On the other hand, the older Dubai districts of Deira, Bur Dubai and Garhoud continue to see rental declines.
Occupancy levels and rents have largely moved hand-in-hand, with newer DED areas and freezones seeing stabilisation in occupancy levels or increases. The sharpest rise in occupancy levels (8%) was witnessed in DIFC with ICD Brookfield Place, Central Park Towers, Index Tower and Burj Daman seeing many new lease executions. ICD Brookfield Place has particularly seen a high number of new leases and clearly shows the market appetite for prime office stock.
“As we move into the final quarter of the year, traditionally a busy period, we expect robust activity levels with demand coming in from new entrants, investors and existing occupiers leading to a race for quality stock in select established office and residential districts,” outlined Cushman & Wakefield Core’s report.
“However, it is important to note that market recovery is expected to be segmented with a few residential districts witnessing slower stabilisation rates, while the Grade B and C office stock which has historically struggled in absorption, continues to face challenges,” it continued.