Dubai offices 45% vacant by year-end as oversupply grows

Jones Lang LaSalle says that vacancy levels for Dubai offices will exceed 45 per cent by the end of 2010 as the oversupply of offices continues to mount. Most of the near-empty projects will be in the non-prime areas like Jumeirah Lake Towers, Business Bay, Dubai Silicon Oasis, Tecom, Deira and Bur Dubai.

That only leaves the Dubai International Financial Centre and the surrounding area as relatively healthy; and the Dubai Marina. And even in the DIFC the proof will only come as financial sector tenants actually take up the space that they have leased. Business has been bad for the Dubai financial sector since the credit squeeze and property crash started in October 2008.

Falling rentals

Dubai office rentals in the upcoming Business Bay district have fallen by 68 per cent from peak prices to $238 per square foot, according to the latest quarterly study from Jones Lang LaSalle.

Office rents in other areas are down 40 to 60 per cent with rentals of $43 to $81 per square foot. Downward pressure is due to the rapidly increasing supply of offices in Dubai, and a stagnant to falling level of demand.

Yet the real office oversupply problem is only just beginning. Jones Lang LaSalle has the current office stock at 46 million square feet rising by another 30 million square feet by the end of 2011 of which 20 million square feet will be completed this year.

This is a doubling of the office supply within a three-year time span. Go back to helicopter photographs of Dubai three years ago and the skyline was very different.

What tends to happen in such a situation is that as rental prices fall the best locations still take up the demand while even very low rentals fail to fill up the least desirable locations. Indeed, agents report continued demand for Grade A buildings, single ownership buildings and the DIFC.

Buildings with multiple owners, as happens with freehold towers sold to multiple buyers, are particularly disliked by tenants worried about who will act as their landlord in the case of problems with the building.

Business cycle

In more mature global property markets this would be the sequence of events: developer goes bankrupt; administrator sells office block cheaply to new buyers; new buyers seek lower rents; office market recovers; new buyers sit on large profit.

But that just does not seem to be happening in Dubai right now. The banks seem reluctant, or indeed instructed, not to bankrupt any developer. Often both are government owned or controlled, and so pulling the plug would cause losses just as big if not greater than holding tight.

In that case many office towers could sit vacant for years until the market requires the space. Other projects are counting on off-plan buyers to stump up the cash to complete them, and whether this money is forthcoming over the next couple of years is anybody’s guess.

Real estate investors should probably hold off until the market has had a real shake out. Normally in global real estate markets that sort of crisis is painfully self-evident – with headline bankruptcies among the top developers – but the clues might be subtler in Dubai, and simply counting empty towers could be the sharpest measure of how low the market has sunk.