We are at a point where we are seeing a dramatic shift in the commercial real estate market, with the following question being raised, ‘Are companies buying offices to avoid future price hikes?’. For the first time in nearly a decade, prices are on the up, both in terms of leasing and sales, causing a sudden surge in demand in office sales, before prices get even higher.
Yet before we delve into the idea as to whether companies are buying offices to avoid future price hikes, it is better to first understand the reasoning behind this surge in demand, or more to the point, what is currently happening with office rents.
Office rents; What is happening?
This year has seen rents at a 9-year low, but things are changing. For the first time in 5 years, rents have increased and beginning to stabilise. So what has happened?.
Over the past 8-10 years, Dubai’s commercial property industry has seen massive oversupply within the market for office space, and as such, the city has not seen many new major developments to increase supply in the market. As of now, the market is in a much more mature stage with a much wider range of commercial office spaces existing. That withstanding, we are now at a turning point where demand is starting to outstrip supply. New stock that has entered the market has generally been re-purposed spaces that landlords and developers have configured in order to re-structure their assets so as to keep on top of the trend of increasing office demand. With no new major developments on the horizon, this trend is set to continue, and as such prices have to go up.
Rental prices for offices have begun to see signs of change first time in five years. Rents at prime office addresses have started to stabilise as demand starts to build up among tenants for bigger floor spaces and flexible fit-outs. With demand for these spaces increasing, potential investors and buyers are seeing new opportunities in the market. This is especially the case when one considers that Expo 2020 is just around the corner, which is expected to bring in new business opportunities for the city. As new companies decide to enter the Dubai market, this will only increase demand for office spaces.
So rents are increasing; how is this affecting buyer demand?
Over the past few months, we have seen an incredible increase in the number of office sales.
Whilst the idea that office sales are on the rise, might seem counterintuitive, given that remote working has seen a huge spike in the last year due to social distancing rules, yet the figures clearly speak for themselves. Managers and decision markets within companies are realising that work from home is not a permanent solution, with physical office space still being essential to most businesses. In terms of office sales, we have seen a 132% increase from last year, up from a 4% decrease last year. Prices are only just beginning to start picking up again, with the cost of offices slowing moving back to pre-pandemic levels.
Bearing in mind that these are the buyers, whilst demand for office space is increasing, that is not to say demand for all types of offices rather they are looking for prime office spaces that are move-in ready. This means buyers are looking for spaces that are fully fitted and move-in ready, that they do not have to spend money on before tenants sign a leasing contract.
It is, therefore, the expectation that current landlords who own shell and core spaces, to convert them to be fully fitted, and even furnish them, in order to satisfy current demand.
Although tenants want spaces that are move-in ready, they are also looking for spaces that can accommodate flexible workspaces. It has been realised that rather than leasing bigger spaces, it is becoming the preference for multi-functional areas, that can be easily changed to accommodate different needs.
‘Green’ office spaces are also seeing a surge in popularity, with an increasing number of companies looking to secure office space that is environmentally friendly, especially since more companies are adopting, corporate social responsibility ethos and policies, wth plans to be more environmentally sustainable. As such Grade A buildings are becoming a priority, especially for larger companies.
It is for these reasons that whilst demand in some areas are increasing, older, less modern buildings are becoming harder to sell, due to there being a lack of demand from tenants.
This can be seen particularly in some of Dubai’s older communities, such as Deira, Bur Dubai and Garhoud, where average rents have been decreasing year on year by 20-25%, with demand dropping in favour of Dubai’s newer communities. It is these factors that potential buyers and investors need to consider, before deciding to make a purchase.
So offices are in high demand, but who is buying?
Probably the most unexpected buyers, are businesses themselves. Whilst it has been relatively uncommon for businesses to buy their own commercial property, with prices at such a low point, and with rents and service charges increasing, they are seeing new opportunities. These companies are realising that buying offices in this current market will make more financial sense in the long run, as it will allow them to save on annual expenditures, which is expected to only increase in price. Although businesses are increasingly deciding to buy the spaces that they are operating in, they are not the only players within the market, with there being an increasing number of investors and individual business owners/CEO’s who are deciding to enter into the commercial property industry, or more specifically, office spaces.
CEO’s and company owners are choosing to buy offices with the idea to rent them out directly to their company. With prices being low, CEO’s can ensure not only does the company get a good price in terms of rent, but also will allow the individual themselves to have a solid investment for several years to come. What is more, they are purchasing more office space than necessary, so that their current business will expand into.
Commercial sales
Investors, both within the UAE and outside, are realising that prices are at a low point, with the belief that with the upcoming Expo 2020, prices will be on the rise again. As such, they are wishing to lock in the prices early, before the property market sees a price hike, allowing them to earn good capital when they decide to sell the property through capital gains. What is more, with rents increasing, investors are seeing offices as a good opportunity to secure alternative income streams. We are also seeing that current tenants are trying to secure longer lease terms. Whilst the primary aim for this is to ensure they do not encounter massive rent hikes, it benefits investors in providing longer-term security in terms of guaranteed income.
So, are companies buying offices to avoid future price hikes?
Well in short, yes. Companies are now realising that now is the best time to purchase office spaces in order to help reduce costs, due to the expected rise in rent and service fees, over the upcoming months and years. With that being said, the demand for all offices is not the same. The demand, is for high quality, fully fitted, and environmentally sustainable offices, and it is here that we will see prices rise. The unfortunate news is that older offices, especially in the older parts of Dubai, are likely to see continued drops in demand, which will force landlords to drop their prices.
It should also be pointed out, that it is not just businesses who are seeking to take ownership of their offices. Investors are also seeing a massive market potential and understand that this is the time to invest in prime, good quality, and environmentally sustainable office real estate
If you or your company are looking to buy office space, contact us today to book a consultation with one of our commercial property consultants.
