Analysts predict that supply in the commercial sector will almost double by 2011, as companies are trimming costs and cutting jobs, leading to further falls in commercial rents.
"Office speculators will be hit and lose money. This is good for occupiers," said Matthew Hammond, the head of agency at Jones Lang LaSalle MENA (JLL).
Landmark Advisory, the consulting branch of the property broker Landmark Properties, estimates that about 2.97 million square metres of new space will hit the market by 2011, versus 3.25 million sq metres today.
Mr Hammond said the figure was in line with JLL estimates. "While the new stock is likely to double the size of the office market, it is substantially smaller than what was planned initially."
Office space in the emirate is now selling for 10 per cent less than three months ago, representing a decline of 48 per cent from the peak of the market last year. Prices today are at a level last seen in mid-2006.
Office construction accelerated towards the end of Dubai's six-year building boom as developers, fearful of an approaching oversupply of residential property, switched to offices from housing. But the wave of newly completed space has arrived just as many companies are downsizing. At the same time, some companies are subletting surplus space, which is putting further downwards pressure on rents.
"There was an enormous spike in the market that was unsustainable. The market now is competitive with other Middle East and African office centres," Mr Hammond said.
Despite the expected rise in empty office space, prime locations across the emirate will continue to enjoy almost full occupancy, according to broker CBRE, which projects the Dubai office rental market's value to rise, despite the increasing vacancy rates, to Dh7.2bn from its current value of Dh5.4bn.
"Although there may be a level of 50 per cent vacancy, there could also be almost full occupancy for good quality offices," said Nicholas Maclean, the managing director of CBRE. "There is quite a lot of stock coming into the market that will prove difficult to let as a result of being tainted somewhere: strata title, inadequate car parking or utilities, or lifts within the buildings."
"Some offices which are poorly located or qualitatively less appealing are going to have a massive swing in value," added Mr Maclean. "The demand is coming closer and closer into the centre. The prime location is World Trade Centre to junction two."
Developments that will see large additions of new space include Silicon Oasis, Dubai International Financial Centre (DIFC), where 557,418 sq metres is under construction, and Jumeirah Lake Towers, where another 557,418 sq metres will be completed next year, according to Mr Hammond. The vast Business Bay development will also contribute to the glut of new space.
Rents for Business Bay towers, which are nearing completion, are quoted in the range of Dh1,615 to Dh1,884 per sq metre a year. This is a substantial discount to the DIFC, where current leases are priced at between Dh4,036 and Dh4,300 per sq metre.
While the projected oversupply will hurt developer's profits, it may also provide a boost to inward investment as foreign companies seek cheaper locations to service the region. Brokers therefore anticipate more demand as prices fall.
"I think that ultimately it will create a greater opportunity for businesses to come to the region as depressed prices make it more affordable to set up their business there," said David Macadam, the director of commercial properties at Better Homes, a brokerage.
Landmark also expects office demand to gradually increase next year after a year of cost-cutting and consolidation.
"We expect to see a marginal increase in office requirements for existing companies, as well as the entrance of a small number of regional or international companies," the Landmark report said.
As competition for tenants increases, landlords are increasingly offering incentives such as fittings, grace periods and easier payment options.
Brokers also predict an oversupply of office space in Abu Dhabi, but at a much lower level. Abu Dhabi will see the addition of about 2.04 million sq metres by 2012.
"There will be a surplus in Abu Dhabi as well. But the market has reacted quickly to the global economy," said Mr Hammond. "There will be a much more measured delivery of the development pipeline into the market."
Source - © The National 2009
