In the aftermath of the pandemic, there has been a notable surge in demand, leading to the absorption of more than 11.5 million square feet of office space over the past three years, with an impressive 9 million square feet absorbed in just the last 18 months.
Many frequently inquire whether office rents will sustain their upward trajectory. When we delve into the present supply and demand dynamics, the concise response is that in the near future, both Dubai Office Rental rents and occupancy rates are poised to continue their ascent.
Emerging from the downturn brought on by the pandemic, Dubai’s office market is experiencing a sustained upward trajectory in both rental rates and occupancy levels throughout the city, reaching historic highs. This surge is propelled by a favorable economic outlook, an accommodating business environment, and a range of economic catalysts that have led to job creation and an influx of tenants. This is evident in the significant increase in new license registrations across the Department of Economic Development (DED) and various free zones.
Remarkably, we have already surpassed the peak office rental rates witnessed in 2014. Since the pandemic, Dubai’s office market has witnessed a remarkable Anticipated Surge in Dubai, with city-wide office rents surging by over 45 percent, and a year-on-year increase of 24 percent.
Back in 2014, during the previous peak, the total office market size stood at just over 81.5 million square feet, and city-wide office rents were at Dh125 per square foot per year. Today, the market has expanded by more than 32 percent, encompassing 107.6 million square feet, with city-wide rents now surpassing Dh138 per square foot per year.
Anticipated Office Space Shortage in the Near Future
The need for office space is increasing at an unprecedented rate, far surpassing the available supply. Currently, office occupancy rates have reached historic highs, with prime/Grade A office spaces boasting a remarkable 92 percent occupancy, while citywide office occupancy levels stand at 87 percent. To put this in context, prior to COVID-19, only 75 percent of the office market was occupied.
This surge in demand, following the pandemic, has led to the absorption of more than 11.5 million square feet of office space in the past three years, with a significant portion, over 9 million square feet, being absorbed in just the last 18 months. In stark contrast, only 2 million square feet of new office space is expected to become available over the next two years, with the majority of it already pre-leased. Consequently, this does not alleviate the existing shortage of supply.
Uptown Tower by DMCC, a recent addition to Dubai’s office landscape, was handed over fully pre-leased, contributing an impressive 495,000 square feet of office space to the city’s total, which now stands at 107.6 million square feet. Notable office handovers in 2022 included projects in the Expo District, Deira Enrichment Project, Dubai CommerCity, and Dubai Hills Business Park. In the coming year, we anticipate the completion of additional projects such as the office component of One Zabeel, Innovation Hub One in DIFC, and the next phases of Dubai CommerCity.
Looking ahead to 2024, both 6 Falak in Dubai Internet City and Tecom’s Innovation Hub Phase 2 are witnessing robust pre-leasing activity and are on track for handover.
It’s worth noting that a significant portion of the office supply pipeline is already pre-leased, leaving limited availability upon delivery.
Although free zones like Dubai South, Expo District, and the outer Tecom clusters possess some existing office spaces, central locations licensed under the Department of Economic Development (DED) are grappling with a significant shortage in supply. The availability of new onshore office spaces currently under construction is extremely limited. As a result, we are witnessing numerous single landlords, who own land portfolios, and free zones actively exploring new office projects or considering the enhancement and repurposing of their existing office inventory.
However, given that the construction cycle for such projects typically spans two to three years, we anticipate a pressing shortage of office supplies in the near future. This, in turn, is expected to exert additional upward pressure on both rental rates and occupancy levels.
Given the rapid rate at which office spaces are being occupied and the scarcity of secondary and new office inventory, we are confronted with a critical shortage of Grade A office spaces in the coming 18-24 months. Nevertheless, as numerous developers are initiating office projects, we anticipate that the supply-demand disparity will be rectified by 2026, as many of the ongoing projects are completed.
Moreover, sizable international corporations seeking substantial office spaces may discover purpose-built alternatives within free zones.
Escalating Dubai Office Rental Rental Rates and Occupancy Levels
As the demand for office spaces surges throughout the city, office districts have experienced year-on-year increases ranging from 5 to 50 percent.
This heightened demand is predominantly concentrated within Grade A projects in both free zone and onshore areas. Driven by sustainability objectives, occupiers are consistently drawn to new Grade A developments. Regional and international tenants are actively seeking single-owned, efficiently managed, and environmentally friendly buildings. While older office stock is witnessing some overflow in demand, it is anticipated to encounter challenges in the medium to long term, as it continues to age and would necessitate substantial investments for upgrades.
Rising Rents in Strata-Owned Office Districts
We’ve observed that rental increases have been notably higher in districts where the majority of office spaces are strata-owned, as they were starting from a considerably lower base compared to areas dominated by Freezone-owned and single-landlord office stock.
Recognizing the favorable market conditions, many landlords, especially those with fully furnished units, are now achieving their asking prices, and, in some instances, even commanding premiums above those asking prices. Consequently, they are experiencing fewer delays in receiving rental payments.
Furthermore, the growing demand for short-term, plug-and-play office solutions is on the upswing, particularly from new market entrants seeking to establish and expand their operations. This trend has resulted in a surge of inquiries from serviced office space operators. Many global serviced office occupiers such as WeWork, ServCorp, and Regus are currently operating at full capacity, and a multitude of local operators are also reporting high occupancy levels.
The Sources of Increasing Demand
The surge in demand is essentially divided nearly evenly between two key segments: new market entrants and existing occupiers seeking to expand their operations. Predominantly, this demand emanates from the banking, financial, and business services sectors, with the technology sector following closely behind.
Dubai’s appeal as a destination for businesses is underpinned by several factors: a robust economic environment, a business-friendly landscape, competitively priced office rentals in comparison to other major global cities, and its strategic central location, straddling multiple time zones that bridge western and eastern markets. These factors collectively make Dubai an ideal choice for firms looking to establish and operate their offices here.
Tenants are increasingly attuned to the evolving market dynamics and are adopting strategies to optimize their existing spaces, often through workspace management tactics and embracing hybrid working models, given the dwindling options for expanding their physical footprint.
Conversely, single-owned Grade A assets are in a favorable position, enjoying high headline rents and robust occupancy rates. In light of strong pre-leasing interest, free zone authorities and prominent single landlords are actively considering the activation of subsequent phases for their office projects. However, aging office stock is poised to encounter challenges in terms of tenant retention and satisfaction. Landlords with older buildings will face pressure to revitalize and refurbish their underperforming assets to bolster rental returns and align with market expectations.
With sustained demand stemming from both new entrants and established players across all sectors, coupled with limited available office inventory, our outlook anticipates a continued upward trajectory for Dubai office rents. We project an additional increase of 10-20 percent in prime areas, with occupancy levels experiencing upward pressure over the next 18-24 months.