Commercial Space Market Analyses - Space Crunch

The Gulf region is suffering a severe shortage of office space and the situation is unlikely to change for some time.

Across the world, the hunt is on for available commercial space. According to market research company, Cushman & Wakefield, which recently published a guide called Office Space Across The World, 2007, the global office market has boomed in recent years, and with it, the prices developers are able to charge for the properties’ rent.

Compared to 2005, which recorded market growth a 4.4 per cent, 2006 was a stellar year for commercial rentals, whose collective growth reached 12.2 per cent globally, the report revealed. As a result, the office rental markets in all regions improved throughout the course of the year.

Of the 211 markets surveyed across 50 courtiers, 74 per cent demonstrated rental growth. By comparison, 20 per cent experienced stable rents and just 6 per cent, or 12 markets, saw their total rental figures decline. The request is the same world-wide: a good location at the right price: “As business sentiment has picked up, take up across all regions has improved, although demand remains focused on the best quality space in the most convenient locations”, reports Cushman & Wakefield analyst Elaine Rossall.

The Middle East commercial property sector could be said to be the victim of the Gulf’s well performing oil and gas markets in particular. The region’s buoyant economies have drawn a mass of new business to the region, but I is clear that it does not, at the moment, have the infrastructure necessary to accommodate their needs. And though there are many drivers behind the MENA region’s buoyant economic performance, which last year saw it achieve annual rent of 32 per cent, high oil prices over the past few years, combines with strong levels of foreign investment, are largely responsible for the region achieving the highest annual rental growth of all the global regions surveyed.

IN TOP GEAR

Underpinning the MENA region’s tight market for office space has been the phenomenal market performance of Abu Dhabi’s commercial sector. “The success of the region in general has been in part due to the huge increases seen in Abu Dhabi, which posted the highest global rental growth of 200 per cent, but all key locations in the region saw good rental growth,” explains Rossall.

Such reports put Abu Dhabi in a league of its own. Its closest contender in terms of overall commercial space growth is India, which was responsible for almost all of the top 10 best performing markets in the world, particularly its suburban locations. Adds Rossall: “Thanks to a boom in financial services and IT, as well as stricter building regulations, rents in most key markets in India have skyrocketed.”

But in terms of overall rents, Kuwait was the star performance this year. Responsible for charging rents of nearly $920 per square meter in 2007, Kuwait also had the second highest level of rental growth in 2007. Year-on-year, this say the country realize an overall rental growth figure of 41 per cent. But Abu Dhabi is not far behind at $890 per square meter.

But the region’s market leaders are not setting a hard act to follow, or not for the rest of the MENA region, which recorded rental growth across the board, and did not show a single stable or declining market.

According to Nicholas Maclean, Managing Director of Los Angeles-based CB Richard Ellis, the region’s strong showing is set to continue, as demand continues to outpace supply, particularly in Doha and Dubai. “I expect office rents in these regions to increase by about 20 per cent over the next year-and-a-half, as demand outpaces supply and international business expand in the Gulf”, predicts Maclean. “The highest quality offices spaces in Dubai cost as much as $135 per square foot but this could rise to $160 per square foot during the next year to 18 months.”

SUPPLY SQUEEZE

Across the UAE supply of office space remains extremely tight. Fortunately, this is set to ease in Dubai as a series of building projects come online in the region in 2008 and 2009. But the same cannot be said for Abu Dhabi. “Supply pressure is unlikely to ease in Abu Dhabi, given the smaller pipeline”, predicts Rossall.

Across the Middle East, political incidents have impacted on office space demand, and some incidents such as the Israel-Lebanon war have impacted the region’s property sector negatively. In other cases, however, conflict in the region has been countered with strong performances in the commercial markets. For example, the ongoing difficulties in Iraq have made Kuwait a preferred base for reconstruction and military functions, as well as a safe base from which international companies prefer to operate.

Beyond the Gulf, Cushman & Wake field predict the global market for office space will concise to perform strongly, as rents rise across even more locations. On the whole, it predicts that demand, which it found is already healthy in most markets, should remain strong, and probably improve in the majority of locations. “We predict rents will rise further and n more locations”, concludes Rossal. “Demand, which is already healthy in most markets, should remain strong with the potential to improve in the majority of locations. Even in markets where take-up is expected to remain stable, demand is generally healthy and the limited supply should continue to crode vacancy rates.”

Should there be political stability in the region, and also a further expansion of multinational business, it seems the Middle East will remain a market leader throughout the world’s commercial real estate sector.

STRONG DEMAND

Demand for commercial property in the UAE has been strong this past year – so constant, that overall deals in 2007 Q4 fell in response to a lack of supply. But although the value of deals might have fallen 11 per cent, sustained demand caused average prices to rise 1.2 per cent.

Due to the strong demand for commercial property in the UAE, Dubai now ranks number 10 in research firm Cushman and Wakefield’s Most Expensive Location ranking, behind New York and ahead of Seoul, London tops the rankings, followed by Tokyo and Hong Kong.

Last year Dubai’s commercial property market witnessed phenomenal growth. Local real estate agency, Better Homes, reported a massive 500 per cent growth in commercial sales over the first three quarters of 2007, and revealed a continued high level of demand on the leasing side, largely because of rising capital values, growing investor confidence and increased market regulation.

According to Colliers International, the average office rent in Dubai is currently (Dhs 220) per square foot. But Andrew Chambers, the Managing Director for Colliers International, says prices across the city vary as is the case with any country: “I would compare areas like Sheikh Zayed Road and DIFC (Dubai International Financial City) to the West End or the Docklands in London, “ says Chambers. “At the lower end of the spectrum you find the bigger free zones.”

Evidence reveals that the biggest demand for commercial space in the UAE is coming from multinational corporations (MNCs). Continues Chambers: “There is a high demand from large multinational companies for office spaces of 1,000sq ft or more.” Fortunately, for those businesses in search of suitable office spaces there are various initiatives in the pipeline that will in time case the bottleneck. A number of office developments are currently under construction in the city, especially near the new airport at Jebel Ali. These alone will add two to four million square foot of office space to the overall market. In the meantime, low vacancy rates will continue to drive high rental rates, particularly in case of offices greater than 1,000 sq ft.

“A lot of the Fortune 500 companies are after spaces of two, three, four or 5,000sq ft for efficiency purposes,” Chambers adds. “So there’s not only a lack of space, but a lack of those bigger plots that are so much in demand.”

But there is respite ahead. In 2008, Dubai’s office space is expected to double, with the delivery of the first significant chunk of the 51 million sq ft planed expected to come online between now and 2010. By this stage, all of the office space currently in the pipeline should have been delivered. All going to plan, the available stock in the emirates should, by this stage, have tripled. And though Chambers is not confident supply problems will be eased in the near future, he predicts prices will at least plateau outside of the high demand areas. “By the end of 2008, early 2009, I don’t expect office rents to go up much more, except along Sheikh Zayed Road and in the DIFC.”

By comparison, the demand for office space in Abu Dhabi has been phenomenal, a result of its strong economy and growing popularity as a business hub. In 2007, HSBC Global Research Report found the office market in Abu Dhabi had occupancy rates of 99 per cent, making it tighter, even, than the residential market. Considering the global average for vacancy rates is 9 per cent Abu Dhabi’s vacancy rate of 1 per cent is extremely low. And at 2 per cent, Dubai’s vacancy rates are only marginally higher.

The main problem is that Abu Dhabi has a severe shortage of purpose-built primary grade buildings. What little it does have is owned largely by government or semi government organizations. With density running at almost five times the global average, and five times that of Dubai, commercial space is therefore almost impossible to find.

The Abu Dhabi office sector has, over the years, grown in spurts. Between 1982 and 1983 office space in the emirate doubled, and since 2000, available commercial spaces have grown again by 50 per cent. Today, the city’s total supply is equivalent to 460,000sq m Abu Dhabi’s problem of office space shortage is made worse by another issue – poor building. At present, most of Abu Dhabi’s buildings are of secondary or tertiary grade, and all suffer a lack of dedicated parking facilities, according to Colliers International Global Office Real Estate Review Midyear 2007. “The quality of the city’s remaining stock (besides primary grade office buildings) is low”, argues Colliers International analyst for Europe, Middle East and Africa, Robert Pearlman. “The finishes of the buildings are generally fair and they offer functional space, but they lack modern communications systems, services and design efficiency.”

There is approximately 415,000sq m of office space under construction in the capital. The emirate’s business community awaits its delivery with anticipation, but whether it is prepared to pay premium for it when it comes online is another question.

The scarcity of office space in Abu Dhabi resulted in average rental increases of 30 per cent between 2005 and 2006. But the level dropped to 10 per cent in 2006 and 2007 following the introduction of a government rental cap. Despite this move, however, rents are predicted to rise until adequate market supply enters the market. This is not expected to be the case until at least 2009.

The demand for office space in Abu Dhabi looks set to increase as the emirate continues on its path to diversification and introduces a number of industrial, financial and free trade zones. In 2006, there were approximately 60,000-licenced businesses in Abu Dhabi and the Abu Dhabi Chamber of Commerce and Industry forecasts the number will continue to grow at an annual rate of 5 per cent. In order to meet this demand, more than 850,000sq m of office space is planned by 2011. This will increase the emirate’s total supply by 85 per cent. Evidence suggests the change cannot come soon enough.

50 COUNRIES ACROSS THE WORLD WERE AKSED THEIR THOUGHTS ON THE GLOBAL OFFICE MARKET AND:

■ Seventy per cent of countries predict that there will be a drop in vacancy.
■ Stable vacancy rates are expected in just fewer than 10 per cent of locations.
■ Sixty per cent of countries forecast a strengthening in demand.
■ No markets in the Middle East expect a drop in demand.

/Cushman & Wakefield/