By Courtney Trenwith
CBRE says developers are converting office projects as vacancies fall below 50%
An oversupply of office space is causing developers to convert some unfinished buildings to be used for residential and hospitality purposes, despite pushing up construction costs, according to market analysts CBRE.
Office buildings in areas such as Business Bay, Dubai Silicon Oasis and parts of Dubai Investment Park are struggling to fill space, with occupancy levels lower than 50 percent in some locations.
The rates could get even worse with numerous new office blocks expected to be ready in these areas in the next three years, including about 40 percent just in Business Bay.
“Landlords are seeing these issues and looking for ways to [reduce] that risk; changing the use to residential or hospitality are potential ways,” CBRE head of research and consultancy Matthew Green said.
“It’s an interesting trend; some owners have decided we can get better value for this development if we go for a change of use.
“It’s a trend we saw in reverse in some parts back in [the 2006-08 real estate boom] when residential landlords would look to convert to office space because office rents were significantly higher.”
While the overall office market is down, residential and hospitality rents have significantly rebounded from the property market crash.
According to the Dubai Land Department residential transactions during Q1 2013 was valued at AED4.7bn ($1.28bn), compared to AED3.1bn a year earlier.
Average two-bedroom unit rents increased 27 percent in Q1 2013 compared to a year earlier, while average villas rents rose 5 percent, according to CBRE.
Hotel occupancy rates have reached 85 percent this year, with average room rates above $303.
According to CBRE, developments in Business Bay that already have been converted include a Damac tower formerly known as Waters Edge, which is now called Burj Damac 5; Fortune Brabo, which was sold to Emirates National Investment Company and renamed Coral; and the new Burj Pacific, which was bought from Dheeraj East Coast developers by Indian company Pacific Ventures.
However, Green said only developments still in the early stages of construction could feasibly be converted from office space into more lucrative usages.
“It’s not straight forward because converting a building requires quite a lot of additional capital expenditure, so it will depend on the progress of that particular development,” he said.
“It might be too much outlay for some owners to go through that conversion process. But I think it’s a trend we’ll see more of.”
Despite a gloomy overall office market, Green said there were pockets that were performing exceptionally well and developers were still planning new offerings in those areas.
“We’re speaking to developers at the moment who are building office space that’s because a lot of the product in the market is not particularly efficient and not really what the larger occupiers are looking for,” he said.
“It may seem quite incredible when you look at the high [overall] vacancy rate of 45 percent but when you start drilling down into individual sub-markets, like the CBD, it’s not easy to find space.”
The vacancy rate for office space in the CBD – defined as the area from the World Trade Centre to Emaar Square, and including Downtown – is about 15 percent, compared to an average 45 percent, according to CBRE.
The best quality buildings are near 100 percent capacity.
Average prime rents in the CBD rose about 4 percent during Q1 2013 to AED1500 per square metre per year.
Select buildings in Jumeirah Lakes Towers (JLT), Business Bay and Tecom also were outperforming the overall market.
For example, in JLT the most attractive accommodation is achieving rates of about AED1200 per square metre per year, while the poorest quality strata owned units are typically available from AED590 sq m per annum.
“Discerning office occupiers continue to set their focus on high quality properties, establishing a growing differential between what is viewed as the ‘best’ and ‘worst’ products in each sub-market,” a CBRE report released Sunday says.
“For the first time since the financial crisis, the decision making process amongst major corporates is starting to shorten, as companies abandon their ‘wait and see’ approach in favour or more direct and decisive action.
“With landlords becoming increasing bullish on the market outlook, we may expect to see further growth in prime rents over the remainder of the year, particularly as occupancy rates in the CBD slowly edge up.”