Declining rental rates have been a feature of the commercial real estate market in the GCC for several years now, but the positive news from a landlord’s perspective is that most markets now seem to have stabilised. US real estate consultant JLL (formerly Jones Lang LaSalle) says prices have bottomed out in all of the major cities with the exception of Dubai and Jeddah, where rates are accelerating.

Jeddah has been steadily bringing new supply online throughout 2013, but because demand has remained strong these properties have been easily absorbed. At the same time, JLL says vacancy rates there have fallen from 14 per cent to 10 per cent.

Continued demand

Average annual rents for Jeddah’s best grade A space, also known as prime space, have risen from about SR1,400 ($373) a square metre to SR1,500 a sq m between mid-2011 and early 2014. Despite another three major projects bringing more office stock into the market in 2014, experts say continued demand from public and private firms will keep vacancy rates low.

“Even in markets with high vacancy rates, new high-quality office space in key locations will not struggle to find tenants”

Dubai, meanwhile, has the largest stock of office space in the region at 7.3 million sq m, and another 1.4 million sq m is planned to come to market by 2016. The result of this oversupply has been the development of a two-tier market, where grade A space in premium locations has seen values rise in recent months, whereas prices are falling for good stock in less popular locations. Despite the Expo win boosting sentiment in the emirate and setting the wheels in motion for another real estate and infrastructure development boom, property firms say there has been no immediate impact on the office rental market.

For several years now, the most popular and expensive place to lease office space has been in the Dubai International Financial Centre (DIFC), where rents peak at AED2,610 ($710) a sq m a year compared with an average rate of AED1,850 a sq m a year for grade A space elsewhere. Other strong performing locations are Burj Downtown, Tecom, Business Bay and Jumeirah Lake Towers (JLT), aided by their proximity to Dubai’s metro system. JLL reports that companies are increasingly seeking space with metro access. This is good news for the real estate markets of Doha and Riyadh, which are the next most-advanced in the region when it comes to developing city-wide metro schemes.

In Qatar, US property consultant DTZ expects to see rental rates for office space grow in Doha this year, after 2013 saw a huge increase in companies taking new premises. Average annual take-up of office space is estimated to be 162,000 sq m, but in 2013 this reached 262,000 sq m. As a result, vacancy rates have fallen to just 10 per cent, which is the lowest in the region alongside Jeddah.

Not surprisingly then, average rental rates are the highest in the region, at QR1,860 ($510) a sq m a year, but even this is conservative compared with some of the most-sought after space in Doha. DTZ reports that in the most attractive areas, small suites of less than 500 sq m – for example, those in West Bay’s Diplomatic District – are commanding rates of up to QR285 a sq m a month, whereas large clients in the same buildings occupying 5,000 sq m can pay just QR145 a sq m a month.

While the markets of Dubai and Doha are experiencing rising demand, others such as Muscat and Manama are more flat. The commercial property sector in Bahrain remains depressed, following the political unrest that began in 2011. As a result, rents are the lowest in the region, averaging BD90 ($240) a sq m a year for grade A space.

Bahrain decline

“Rates have dropped a lot and I can’t see them rising any time soon,” says Catesby Langer-Paget, head of property agency Cluttons Bahrain. More costly areas such as the Diplomatic District and Bahrain Financial Harbour have suffered as fewer firms are willing to invest in expensive office space. JLL estimates that it will take the market at least two years to recover due to weak demand, the current oversupply, the volatile political situation and competition from Dubai and Doha.

The Muscat market, meanwhile, has been more steady. “In general, Muscat is pretty stable,” says Shruti Dilip, head of commercial and retail leasing at Cluttons Oman. “It doesn’t have the peaks and troughs you find in other markets. There was a boom before the recession and then a downturn, but since then it has stabilised.”

Prices are among the lowest in the region at RO102 ($280) a sq m a year, but this is partly due to the nature of the office space and customers who are unwilling to pay the premiums associated with international-standard grade A space. “There is no building in Oman that you can compare to the DIFC or Emaar Square,” says Dilip. “People in Oman don’t want to pay service charges and they don’t want to pay common area costs as they are not used to it. For a landlord to go ahead and build a massive building with big atriums and security doesn’t make sense financially, so they don’t do it.”

Among the most important criteria for tenants of commercial space in Oman is the availability of parking. Municipality regulations require two bays for each 100 sq m of floor space, but most tenants need more than this. However, with land costs high and tenants unwilling to pay a premium for the addition of more parking, landlords are loath to provide it. The most-sought after are buildings with adequate parking in less congested parts of the city. The highest rates are commanded in the Shatti al-Qurum and Al-Khuwair neighbourhoods.

Oman spending

The firms seeking commercial space are generally involved in construction, oil and gas, law and banking, which reflects the high levels of state spending currently being witnessed in the sultanate. This strong demand means rates have remained stable despite the rollout of new office stock in 2012.

“About 18 months ago, there was about 150,000 sq m of grade A space delivered in Muscat, but as that has now been taken up, you see a steady rise in interest in grade A space, which has high occupancy levels,” says Dilip. “We are expecting more grade A space to come to market in the third and fourth quarters of 2014.”

Abu Dhabi too has seen a flood of new office space, with 140,000 sq m coming online at the end of 2013 from projects such as Capital Tower, World Trade Centre and Landmark Tower. This caused vacancy rates to rise slightly from 38 per cent to 39 per cent, according to JLL, but grade A rental rates remained stable. Like Dubai, Abu Dhabi exhibits a two-tier market, where the best space retains its price but lower-quality grade A space in less popular locations continues to decline.

Despite the high vacancy rates, there is still a shortage of high-quality grade A office space in the emirate, meaning the new properties coming to market should find plenty of demand.

JLL estimates that by the end of 2015, there will be about 3.9 million sq m of stock in Abu Dhabi, an increase of 26 per cent from today. Government bodies remain the biggest tenants, while private entities tend to take smaller units. This is the reverse of the situation in Kuwait City, where data from asset management and investment banking firm Kuwait Financial Centre (Markaz) shows 85 per cent of office space in the central business district is taken up by private sector firms in industries such as finance, business and real estate.

Kuwait balanced

In its Kuwait Real Estate Sector Outlook 2013 & 2014 report, Markaz expects rents to remain stable throughout 2014, with incremental demand across the market of about 54,000 sq m a year, driven by private sector growth, rising government demand and private tenants moving into better-quality office space as it becomes available.

This upgrading, described by property firms as ‘flight to quality’, is a common feature across all GCC countries, meaning that even in markets with high vacancy rates, new high-quality office space in key locations will not struggle to find tenants. In fact, looking ahead, some markets will even see price increases in this sector as competition for the best space, particularly in Doha, Dubai and Jeddah, increases with rising demand. However, landlords of secondary space and even grade A offices in less popular locations will continue to find the markets challenging.