By Shane McGinley
Occupancy rates also fall as oversupply continues to be a problem for landlords
Commercial office rental rates in Dubai’s main financial areas fell 18 percent year-on-year in the second quarter of 2011, according to a new report issued on Wednesday.
Occupancy rates have also continued to fall as oversupply continues to be a problem for landlords, the latest report from real estate consultants CB Richard Ellis (CBRE) has revealed.
While office rental rates have begun to stabilise, CBRE found that they plunged 18 percent in the second quarter of 2011, compared to the same period last year.
In the Dubai International Financial Centre (DIFC) average rental rates are now averaging between AED110 and AED180 per sq ft, and are now at levels lower than even 2005.
“Real estate will remain under pressure with occupancy levels falling further as new supply completes,” the report said.
"We see a two-tiered market evolving over the medium term, with rental stabilisation and small increases seen in good quality single landlored-owned buildings that are centrally located or positioned in the stronger freezone authorities," it added.
While big financial names such as Barclays Capital, Citibank, Standard Bank and Goldman Sachs announced new leasing deals in the second quarter, CBRE said landlords would have to start offering better incentives in order to compete.
With DIFC set to see a 40 percent rise in office space this year, independent landlords are the ones which will feel the pinch the most, analysts said last month.
Rents and occupancy levels in buildings owned by third-party developers are likely to suffer most from the up to 800,000 sq ft of office space due to come online this year, with landlords already reporting higher vacancy levels than those seen in DIFC Authority-owned units.
“This is a significant amount of space, not only in terms of DIFC, but also within the Dubai framework,” said Ian Albert, regional director, Middle East, at Colliers International.
“With rents falling in other areas we have seen tenants reducing their amount of space in DIFC and moving some back-of-house operations to other areas in Dubai to take advantage of significantly lower rates elsewhere.”
Dubai’s commercial market has been badly hit by the emirate’s real estate collapse. The city has empty office space equal to about nine Empire State buildings, with a further 13.1m sq ft of office space due to be completed this year.
Office vacancies in Dubai are expected to surpass 50 percent over the next year, Jones Lang LaSalle said on July 5. Commercial values fell 16 percent in the second quarter from a year earlier, JLL estimated.
Potentially the worsening vacancy rate in the office market may have a knock on effect in the residential segment. Occupancy of 100 sq ft of office space equates to 1,000 sq ft of residential was a ratio frequently quoted by Dubai developers around 2007.
If this remains a relatively accurate calculation and the supply of residential is still growing in tandem with available office space then there is a compounding residential problem too.
If this helps to attract new businesses it may be help a recovery. Main concern is failing below the "critical mass" needed to keep proper maintenance levels. Not a big worry for smaller ventures like mine who can pack in 48 hours and essentially work from anywhere, but if you are talking larger organizations I am sure that will be a concern.