Nearly a quarter of all office space lies vacant in Dubai

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The importance of the physical office is unlikely to be diminished in Dubai as many businesses see a loss of productivity during the current “work from home” era caused by the coronavirus crisis, according to experts.

Robert Thomas, head of agency at real estate consultants Core, said that although the work from home will remain prevalent within hybrid models, it has also created problems for some businesses.

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“While the initial adoption of widespread work from home arrangement was met with great enthusiasm, many enterprises are now witnessing that lack of social connections and no clear separation between personal and professional life is causing loss of productivity and lower levels of engagement,” he said.

His comments comes as Core research revealed that a quarter of all office stock in Dubai is currently vacant.

Out of the total 104.9 million sq ft of office stock in Dubai, nearly 25.2 million sq ft is vacant, with the volume of vacant stock gradually increasing over the last five years.

That said, a polarising performance has been witnessed between Grade A and Grade B areas with most of the market witnessing a flight to quality. with Grade A areas typically witnessing resilience in both occupancy and rental drops.

Thomas said: “Although we agree that work from home will remain prevalent with hybrid models the largely accepted workplace strategy, the importance of the physical office is unlikely to be diminished as businesses will need common spaces to foster innovation, productivity and teamwork that are hard to sustain through remote working.”

He added: “The office market saw increased relocation activity (during Q3), particularly from SMEs and regional firms as most businesses adjusted to market conditions. International corporates on the other hand are mostly continuing to work from home for the remainder of 2020 with their real estate decisions deferred to 2021. We expect a second wave of relocations in 2021 when these large corporates adjust their workplace strategies.”

ICD Brookfield Place was the most prominent Dubai handover of the year in September, adding nearly 1 million sq ft of Grade A office space.

According to Core, office rents have been under pressure across all the 15 districts it tracks. However, freezones with predominantly single owned office assets with relatively higher occupancy levels such as DIFC, Dubai Internet City and Media City, DWTC, DAFZA and D3 have shown resilience with nominal rental drops.

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Old Dubai locations such as Deira, Bur Dubai, Garhoud and Sheikh Zayed Road have seen average rents fall in the range of 5-10 percent year-on-year. The weakest performing areas are the strata districts of Business Bay and JLT displaying a steep 20 percent year-on-year drop in average rentals.

Core noted that occupancy levels have contracted across the board as first phase expansions remain limited and most new demand stems from relocation activity, keeping net absorption negative.

Its report said: “The UAE government has been very proactive and agile in navigating through this ongoing situation with unprecedented fiscal stimulus measures and policy reforms deployed to soften the impact on businesses while maintaining the highest standards of public health measures to curtail the spread of Covid-19.

“As we draw closer to the end of 2020, with signs of gradual revival seen across sectors, we remain cautiously optimistic of a stronger 2021 on the back of ease in global travel, potential availability of vaccinations and undoubtedly the positive impact created by the upcoming Expo.”

The Dubai Market Update for Q3 also said that Dubai saw nearly 21,500 residential units come to market so far in 2020, bringing total residential stock to 571,500 units. There are over 10,500 units expected to be handed over in Q4, taking the total 2020 deliveries to 32,000 units – albeit significantly lower than the initial conservative forecast of 49,000 units at the beginning of the year.

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“While there are other factors at play such as lower realisation rates over the past several years, we have seen the impact of Covid-19 cause a significant slowdown in handover volumes,” said the Core report.

It added that in Q3, secondary market transaction volumes saw a 6.5 percent increase compared to Q1 due to the release of pent up demand built over a subdued Q2.

Q3 transaction volumes were also up by 10 percent from Q3 2019 numbers. Despite the rise in secondary transaction volumes, Core noted that sales prices continue to follow a downward trajectory with almost all areas showing “sharp double-digit year-on-year drops”.

Core added that Dubai’s off-plan market activity is facing an interim lag in transaction volumes as buyers are increasingly preferring ready units to avoid further uncertainty and delays that may be expected from the off-plan market.

Prathyusha Gurrapu, head of research and advisory at Core, said: “The government is implementing many demand drivers to spur recovery including the recent retirement visa regulations which is expected to create long-term demand as more resident expats and international buyers choose the UAE to settle down, thus contributing to sustained inward investment and population growth.”

With many facing salary adjustments in the wake of Covid-19, he added that household incomes have contracted in almost all income brackets, resulting in considerable movement in the rental market with high enquiry levels witnessed in Q3.

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“While landlords may not completely agree with increasing tenant demands, most landlords are now willing to negotiate lower rents and flexible lease terms upon renewals to retain tenants. This has led many tenants to remain in their current premises as they have been able to achieve rental savings upon negotiations while avoiding uncertainty and additional moving costs,” said Gurrapu.

However, many have relocated to achieve significant savings as rents have fallen sharply over the last few months. Tenants can now find newer build and occasionally bigger units at similar or lower rents than what they were previously paying.

Core’s report said rents in apartment districts have fallen sharper than villa districts with a higher share of apartment districts witnessing double-digit year-on-year drops. The weakest performing apartment areas were Dubai Sports City (-20 percent), Dubailand (-18 percent), The Greens and Views (-15 percent), and JLT (-14 percent). The villa communities witnessing the sharpest year-on-year declines are Reem-Mira and The Villa in Dubailand (-21 percent) followed by The Springs and The Meadows (-13 percent) and Jumeirah Village Circle (-12 percent).

With many districts transacting nearly 35 percent lower than their 2014 peaks, sales prices remain at a cyclical low and investor buyer interest remains strong, particularly for competitively priced ready units.

Gurrapu added: “Although this rise in transaction activity may be perceived positively, particularly in the residential market, it is most likely a release of pent-up demand created over Q2. It would be interesting to see if these activity levels are sustained over the near to mid-term as positive demand drivers such as lower interest rates, increase in loan-to-value ratios, retirement visas and fractional ownership of title deeds are implemented.”

Five things we learned:

  1. Out of the total 104.9 million sq ft of office stock in Dubai, nearly 25.2 million sq ft is vacant
  2. A polarising performance has been witnessed between Grade A and Grade B areas with most of the market witnessing a flight to quality
  3. According to Core, office rents have been under pressure across all the 15 districts it tracks in Dubai
  4. The weakest performing areas are the strata districts of Business Bay and JLT displaying a steep 20 percent year-on-year drop in average rentals
  5. Dubai saw nearly 21,500 residential units come to market so far in 2020, bringing total residential stock to 571,500 units



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