Dubai office market regains “Competitive Edge”

Jones Lang LaSalle MENA’s Q2 2009 Dubai Office Market Snapshot

The Dubai commercial property market is becoming more competitive on a global scale as falling rents and increased vacancy make the city more attractive to potential tenants, according to Jones Lang LaSalle MENA’s Q2 2009 Dubai.

Office Market Snapshot
Office rents across Dubai continue to decline but at a lower rate than before.  Rental decline in Q2 2009 averaged 25% compared to a 45% decline in Q1 2009. Office rents for Grade A space across Dubai (excluding the DIFC) now average AED 225 per sq ft annum. This is in line with those seen in mid 2007 and is similar to rental levels in other major commercial centres globally, making Dubai more competitive moving forward.

A further decline in average rents is likely, due to increasing levels of new supply. By the end of 2011, 25 million square feet of additional office space is forecast to enter the market which will increase the vacancy rate and place further downward pressure on average rentals. In Q2 2009, the vacancy rate has increased to around 25% in the face of more than 2,000,000 square feet of additional space entering the market in a period of subdued leasing demand.

The global economic downturn has certainly been a major factor in reducing the level of demand as many tenants have either downsized, delayed their expansion plans or wait to see where rents may settle.
Matthew Hammond, Head of Agency at Jones Lang LaSalle MENA added:
“The market has swung in favour of tenants over the past six months and there are some very attractive deals available in a range of newly completed buildings across Dubai.  This has created a situation where tenants can take advantage of tomorrow’s prices today and negotiate rents below current asking levels”.

The average prime office rentals in Dubai are now below those in the major international office centres of London, Paris, Hong Kong, Mumbai and Moscow. Hammond further adds:
“The market is currently characterised by three owner groups: investors/developers, strata title owners and distressed tenants.  We continue to see investors/developers keeping rents at a sustainable level to allow for development instead of chasing the market down. There are, however, fewer tenants willing to commit at these rental levels.

Tenant sublet space was a new phenomenon to Dubai at the end of last year as additional expansion space fitted out by tenants was put onto the market.  This group are keen to cover costs and are not looking to achieve the best rents.  As a result of this and because a fit out is generally already in place, this space has been the first to be let.

The difficult group to track are the strata owners, many of whom are distressed and do not want to hold office space for a long period of time. This group are cutting rents to try to under bid any competitors and it is predominantly this group that are driving rents down as they look for occupancy at any level”.