Dubai firms postpone office expansion plans amid coronavirus uncertainty

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Companies are adopting a wait and see approach to taking up new office space in Dubai as employment in the emirate is forecast to contract by over 9 percent as the coronavirus pandemic continues to bite.

In the year to September, average rents in Dubai fell by 6.5 percent, with prime office rents dropping less (by 4.7 percent), according to new figures.

Nearly a quarter of all office space lies vacant in Dubai

Real estate expert says there will always be demand for the physical office despite challenge of coronavirus pandemic

Taimur Khan, associate partner, Knight Frank, said: “Given the current level of economic uncertainty, it is not surprising that we have seen limited levels of additional take-up in Dubai’s commercial market, with many firms suspending any expansion plans or adopting a wait-and-see approach.”

Given the challenging economic backdrop, employment is set to contract by 9.1 percent in 2020. If Dubai’s economy recovers as expected, employment is set to register growth rates of 6.7 percent and 5.1 percent in 2021 and 2022 respectively.

The transport, storage and IT and the consumer services sectors are expected to see the most significant declines in employment, decreasing by 14 percent and 12 percent respectively, according to the Dubai Office Market Update released by Knight Frank Middle East.

However, despite the challenging landcape, Savills said office leasing activity remained largely stable during the first half of 2020 despite strong headwinds caused by the Covid-19 pandemic.

Similar to the last few years, the demand was driven by consolidation and space optimisation strategy by existing corporate occupiers in the city, said Paula Walshe, director for International Corporate Services at Savills.

Paula Walshe, director for International Corporate Services at Savills.

“The majority of enquiry levels and transactions during the first half of the year were for small and medium sized office space… However, a few large sized office transactions were concluded by global tech companies in H1 as the city continues to lead the region as a preferred base for corporate occupiers across sectors,” she added.

She noted that as most companies are still operating at reduced capacity and are anticipating their overall headcounts to reduce going forward, many landlords have been offering rental rebates and postponing rental collections to support companies with the much-needed cash flow.

The Knight Frank report showed that occupiers are, where possible, looking to take advantage of weaker market conditions to upgrade occupational space while being mindful of increasing total spend.

It also said that landlords are expected to remain flexible in order to retain and attract occupiers.

The report comes as data from the Dubai Statistics Centre shows that as a result of the Covid-19 pandemic and its impacts on global economic activity, Dubai’s GDP is expected to contract by 7.4 percent in 2020. According to forecasts from Oxford Economics, Dubai’s GDP is not expected to return to its 2019 level before 2022.

Taimur Khan, associate partner, Knight Frank

Khan added: “Despite this weaker backdrop, many firms, where tenancy contracts allow, are taking the opportunity to take advantage of weaker market conditions to upgrade their occupational space. Given recent changes in dual licencing regulations, Prime and Grade A offices in Free Zones are most likely to benefit from this flight to quality.”

As at Q3, average prime office rents across Dubai were recorded at AED205/sq ft, average Grade A rents at AED130/sq ft and average citywide rents at AED100/sq ft.

Knight Frank said that while vacancy in most prime projects remains relatively low, over the course of the year with the delivery of additional supply that rate is likely to increase.

The Grade A vacancy rate is also expected to see a marked increase over the coming year as the vast majority of supply scheduled to be delivered in 2021 is of Grade A quality.

Currently there are estimated to be 25 active projects within Dubai, with delivery dates up to 2024, which are either being executed or in the study or design phase. The total value of these projects currently is estimated at $7.6 billion.

Savills said the Dubai office market remains tenant favoured, adding that contrary to the sharp slowdown in domestic economic activity due to the pandemic induced lockdown, the city continued to record exceptional growth in foreign direct investments (FDI) during the first six months of 2020, with 190 projects worth AED12 billion.

On the future of the office market in Dubai, a Savills survey over the summer revealed that 89 percent of respondents believe the office will remain a necessity for corporate organisations, with 47 percent believing this to be the case in the future, and 42 percent believing this to be the case at least in the short-term.

The role of the office as a hub for in-person collaboration, innovation and the reinforcement of a company culture will carry more weight than before as it looks to differentiate between the home environment. The focus going forward will be to ensure the office is designed and managed to best serve the needs of the workforce.

Swapnil Pillai, associate director Research Middle East at Savills said: “The sector is undergoing a structural change and this trend has been accelerated by the pandemic. There is an increased interplay between technology and real estate and a conscious focus of the health and wellbeing of employees. This has led to strong increase in demand for international quality developments which offer better building ventilation, increased security and connectivity and other add-ons such as advanced air filtration systems.”

Swapnil Pillai, associate director Research Middle East at Savills

The Knight Frank and Savills reports come just days after real estate consultancy Core said 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.

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

“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.

Core research also 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.

Five things we learned

  1. Average office rents in Dubai fell by 6.5 percent, with prime office rents dropping less (by 4.7 percent).
  2. Given the challenging economic backdrop, employment in Dubai is set to contract by 9.1 percent in 2020.
  3. Currently there are estimated to be 25 active projects within Dubai worth $7.6bn, with delivery dates up to 2024.
  4. Savills survey over the summer revealed that 89 percent of respondents believe the office will remain a necessity for corporate organisations.
  5. Dubai continued to record exceptional growth in foreign direct investments during the first six months of 2020, with 190 projects worth AED12 billion.

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