A glut in office space across Abu Dhabi is likely to force landlords to offer more rent-free periods and fit out allowances in their attempts to lure prospective tenants.
“Tenants are clearly in a strong negotiating position, which is likely to improve as further new supply enters the market over the next 12 months. Leasing incentives such as rent-free periods and fit out allowances are expected to increase across all building grades over the next six months,” Jones Lang LaSalle (JLL) said in its second quarter report released on Monday.
“The expanding range of new office supply is likely to spark a wave of increased rental incentives and other inducements, as the competition for tenants intensifies. In the current market climate, tenants remain particularly price sensitive and are attracted to projects where landlords adopt the most flexible terms and conditions,” the report said.
According to real estate agents, rent-free periods can extend from anywhere between three and six months for long-term leases.
Current office space stock in the capital stands at 2.72 million square metres at the end of Q2 2012, with approximately 16 per cent being Grade A, 41 per cent Grade B and 38 per cent Grades C & D. This is expected to touch 3.77 million square metres by end of 2014 with the proportion of Grade A office space increasing significantly.
According to JLL, the only major new delivery in the second quarter was the Al Noor office tower at Al Muneera, Raha Beach, which added around 17,600 sq metres of gross leasable area. This brought the total office stock to 2.72 million sqm.
A number of office projects are scheduled to be delivered in the second half. These include Nation Towers on the Corniche, Al Bustan Complex on 29th street, Trust Tower at Central Market, ADIC HQ (Al Bahr Towers) and Capital Tower at Capital Centre. These projects will add another 345,000 sqm to the market in 2012. The report, however, states that some of these projects could be delayed.
Average rents for Grade A office space have dropped in Q2 by six per cent to Dh1,600 per sqm with year-on-year decline being 14 per cent from Dh1,850 per sqm in Q2 2011.
Average Grade B rents remained steady at Dh1,400 per sqm during Q2, as landlords benefitted from lease renewals and higher occupancy rates in established locations.
“It is anticipated that secondary / lower quality buildings will, however, be hardest hit as more high quality space is introduced to the market over the next 12 months. The gap between Grade A and Grade B rents is therefore expected to widen in the future,” JLL said.
Given modest take up rates and rising stock, vacancy rates are expected to increase and rents are expected to fall further over the short to medium term.
JLL says recovery of the office market is largely dependent on the government’s economic development initiatives to drive employment growth in office related sectors.
“The decrease in residential rents and availability of better quality housing will have a positive impact on office demand by making Abu Dhabi more attractive for companies to relocate or expand their offices,” the report points out.
Demand from the private sector remains limited, with most current requirements being for relatively small office spaces of between 300 and 400 sqm.
Most of the large-scale demand is likely to come from government companies. However, most of this demand is likely to be met by their own HQ projects, JLL said.