Dubai occupied space rises by 70%

The level of occupied space in Dubai has increased by close to 14 million square feet over the past two and a half  years (end 2007 to mid-2010), which represents an increase of around 70 per cent in occupied stock, Jones Lang LaSalle said in a new report.

Despite this strong demand, excessive levels of new supply have resulted in an oversupply of office stock. The total stock of office space has increased around 140 per cent, roughly twice the additional demand between the end of 2007 and mid-2010. This has resulted in the market now experiencing significant vacancy levels, with a per capita office provision rate amongst the highest in the world, the global consultancy said in its September report.

However, these market conditions are not unique to Dubai. Other emerging markets such as Shanghai, Singapore, and Moscow have all experienced similar conditions, which include an oversupply scenario and high vacancy rates. The experience of these markets is that vacancies for CBD space adjust more quickly than envisaged at the time, typically taking between two and four years to recover and reach more stabilised conditions. Outside of the CBD, vacancies are likely to remain at excessive levels for a number of years, with some buildings unable to attract any tenants in the foreseeable future.

Dubai's office market will become increasingly "tenant-favourable" over the next 18 to 24 months with vacancies rising further across the market. This will boost the competitiveness of Dubai and increase its attraction as the major business and financial hub of the MENA region.

While further initiatives to stimulate demand are required, the most effective strategies for reducing the excessive level of vacancy in the Dubai office market will be those which seek to reduce future supply and encourage the withdrawal of existing office buildings through demolition or adaptive re-use to non office activities.
 
Reducing supply technique
 
Meanwhile, developers should consider the "mothballing" and "consolidation" options to reduce future supply as the development industry in Dubai has shown less restraint, JLL said.

"Our analysis of overseas markets suggest that the development industry is to some extent self regulating, with planned projects being delayed or cancelled altogether in periods of oversupply. To date, the development industry in Dubai has shown less restraint, although a number of the more ambitious projects have now been scaled back significantly, delayed or cancelled altogether," the report added.

Mothballing involves stopping the construction of projects where development has already commenced, with the filling in of holes in the ground and the weatherproofing of partially completed buildings, JLL said. These techniques were widely used by developers in Bangkok, Jakarta and other South Eastern Asian cities upon the onset of the Asian financial crises in the late 1990's.

A number of half completed projects were mothballed (sealed up) with completion only occurring in recent years, up to 10 years beyond the original schedule. In some cities, completed but unoccupied office buildings have remained closed up for over a decade before being refurbished and restored to the market.

Variations of this technique have been adopted by developers in areas such as Business Bay in Dubai, where projects that are 99 per cent physically complete are being withheld from the market until demand improves or associated infrastructure works have been completed.

With running costs likely to exceed revenues in many instances, closing up buildings may be an increasingly attractive option for some buildings.

Another feature of project mothballing in overseas markets was the introduction of short-term uses within stalled "holes in the ground."

Temporary uses such as golf driving ranges, car parking, and retail warehouses not only generate activity and improve the urban environment but also provide interim income for the developer of stalled projects, the global consultancy said.

Where projects comprise multiple towers, consolidation is being increasingly adopted by developers in Dubai. This involves the focussing of efforts on the completion of just one part of the project, with other components being placed on hold. In many cases this strategy involves the consolidation of off plan sales into those parts of the project to be continued.

The future health of the office market will ultimately be driven by affordable rental rates in a market with the infrastructure to support business requirements and established global connectivity. Continued corporate interest will allow Dubai to retain regional competitiveness and further increase its attraction as the key business hub for financial services and regional headquarters over time, the report added.

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