Dubai office space influx set to pull in new tenants

About 2.3 million square feet of office space - as much as the area of Dubai's financial centre - is about to hit Dubai's property market. The new space is being delivered at a time of falling prices and high vacancy rates.

The Dubai Government has hired CB Richard Ellis (CBRE), a global property services company, to lease out the space, which consists of 10 buildings in two clusters near Dubai's new airport. A 220,000 sq ft headquarters building has been completed and is partly occupied at the Dubai World Central Office Park. The rest of the space is almost ready for new tenants.

Declining office rents have helped sell Dubai to foreign businesses as a low-cost hub, but the glut of supply has also stung developers and investors on the other side of the transactions. Majed Azzam, a property analyst at AlembicHC in Dubai, said the outlook for prices remained bad.

"We're quite bearish on the outlook at least over the next two years," he said. "Supply is coming on the market when conditions continue to deteriorate globally."

On the eve of Dubai's Cityscape Global property conference, Nicholas Maclean, the managing director of CBRE in the Middle East, acknowledged that filling the space would take years, but he said he did not expect Dubai's oversupply of commercial space to hit demand severely.

The space in Dubai World Central (DWC) - an area on Dubai's western edge that encompasses Al Maktoum International Airport - would appeal to a narrower group of customers in need of large amounts of space and proximity to shipping and logistics facilities, he said.

"It will appeal to those parties who concentrate on the logistics components of the business and see the opportunity to now take accommodation adjacent to an airport which is going to have 100 million-passenger capability over the next 10 years," Mr Maclean said. "So it sits quite nicely as a separate category in the marketplace."

Yet the office buildings are coming on to the market at what some analysts say is a time of stress and uncertainty. Vacancy rates in Dubai office buildings are averaging 44 per cent, said a report yesterday from the property services company Jones Lang LaSalle.

Landlords are being forced to offer a wide range of incentives to attract tenants, from years of free rent to concessions on service charges, utilities and lease lengths.

"We are seeing longer and longer rent-free periods used as an incentive," said Robin Pugh, the head of agency in Dubai at Jones Lang LaSalle, a competitor of CBRE. The office market in Dubai, he added, was stratified, with some districts still in high demand and others suffering from a toxic combination of oversupply and low demand.

Generally speaking, Dubai's central business district continues to enjoy healthy demand, while the outlying areas, including places near DWC, are seen as less desirable, Mr Pugh said.

"If you take the central business district, it's got a very good story, but if you look at some of the outlying areas it's hard to see where the demand is going to come from," he said.

As news about the global economy grows gloomier by the day, analysts also wonder about the appetite among foreign companies for space in newer parts of Dubai. Put off by the latest round of economic angst, many companies are likely to be re-evaluating or deferring plans to open international bases.

"I think that area could potentially be a more central area, but as things stand it remains undeveloped," said Mr Azzam. "The global environment is deteriorating, and I think Dubai and the UAE will be impacted in terms of logistics, trading and so forth."

Already, office rents in Dubai Investment Park, which is in the same part of town as DWC, are just Dh538 (US$146.48) per square metre, according to a new survey from Jones Lang LaSalle. That contrasts with top-end rents of more than Dh1,600 per sq metre in more desirable parts of the city.

It is unclear where the new office buildings in DWC sit on that rent spectrum, but Mr Maclean said its location and low costs made the development advantageous for companies using Dubai as a base for operations in Iraq and other parts of the northern Gulf. "The general oversupply in the marketplace we don't think is going to impact the general demand there once we prove to people that this is a reality - DWC is operational, the money has been spent, the airport and … facilities are ready to go," he said.

And while declining rents have been a thorn in the side of local developers, they have been a boon for businesses looking for space in Dubai. Mr Maclean said CBRE was on pace for a record leasing year since the company moved into the country six years ago. A CBRE representative said "normal incentives" would be given to tenants depending on the size of the space they leased and for how long.

afitch@thenational.ae