Office sales and rents fell in March, but long-term outlook remains positive

This past March was a damper on Dubai’s office market, putting the brakes on the exponential growth of past years in 1Q. Sales and rental activity slowed noticeably during the month as regional tensions, Ramadan, and a more cautious business environment prompted some occupiers and investors to hit pause on prospective transactions, according to data from CavendishMaxwell.

Transaction volumes nosedived in March, dipping to 266 from January’s 679 and February’s 621 on account of both the regional war and the usual Ramadan slowdown. That’s a 13.4% y-o-y decline, compared with double- and even triple-digit growth in the first two months of the year.

Beware the lag: “Transactions recorded in March likely reflected a mix of [agreements] agreed both before and during the escalation of regional tensions,” Cavendish Maxwell’s head of research Ali Siddiqui tells EnterpriseAM. While there was likely a more cautious sentiment during the month due to the war, Siddiqui thinks the coming quarters are likely to provide a clearer indication of underlying market direction and the extent to which external developments influence occupier and investor behaviour.

Already, April has seen volumes rebound, “suggesting that activity did not come to a standstill,” he says, though May saw them moderate. “Investors and occupiers remain cautious amid a more uncertain operating environment,” he adds.

This is not surprising: As we’ve previously reported, Knight Frank's Adam Wynne said leasing enquiries slowed noticeably after February, and while some occupiers paused decision-making for several weeks in March, many have since returned to the market with long-term expansion plans intact.

Behind the numbers

Ready offices saw the bulk of the decline, falling 63%, while off-plan transactions were up 127.5%, but Cavendish Maxwell flagged a longer registration lag in the segment skewing interpretation.

January and February accounted for 83% of quarterly transaction volumes and more than 81% of total value, with ongoing business setup and international corporate expansion driving activity. While overall transactions were up 74.6% y-o-y and the total value of sales jumped 203.5% to reach AED 8.2 bn, the bulk of this came from the pre-war market.

Office sales prices rose 22.9% y-o-y to AED 2k per sq ft in 1Q, while rents increased 20% to AED 191.9 per sq ft. This growth was driven by tight vacancy levels in Grade A buildings and sustained demand for premium office space, with DIFC rents rising 28.2% y-o-y and Downtown Dubai prices up 27.0%.

Old is… not gold: “Submarkets with a high concentration of Grade A stock and established occupier bases are better positioned to weather near-term uncertainty,” Siddiqui says. “Vacancy in these locations remains tight and occupier demand continues to hold, while older and more peripheral locations — which were already recording modest rental growth prior to March — face the greatest competitive pressure in an environment where occupiers are becoming increasingly selective,” he adds.

Off-plan transactions were the most popular among investors, jumping 490.7% y-o-y during the quarter and accounting for 60.7% of sales — marking the first time since 2010 that off-plan activity overtook ready transactions in a quarter.

Looking ahead

It all depends on where things go from here when it comes to the war. “A further escalation could weigh on business confidence at a time when decision-making timelines are already becoming more prolonged,” Siddiqui says. “The ready transaction segment, which has softened in recent months, would likely be among the first to reflect any renewed deterioration in sentiment,” he adds.

Despite the softer sentiment, the DIFC continued to attract international firms during and after the quarter, with companies like ICICI Prudential Asset Management and Finreon joining after the war.

Cavendish Maxwell expects the market to remain supported by Dubai’s regulatory environment and tax competitiveness. The DIFC is already weighing regulatory changes that could help attract new types of firms, including potentially opening up its prescribed company regime to a wider pool of users by scrapping eligibility restrictions. This comes at a time when capital flight amid ongoing geopolitical uncertainties remains a major risk for the region. Siddiqui also points to Dubai’s AED 2.5 bn in fiscal support as a sign the government is willing to provide backing.

On the supply front: Supply is tight for now, though some relief may be on the horizon. Around 73.3k sqm of office space was delivered during the quarter, with another 240k sqm expected to come online this year to bring total office stock to 9.7 mn sqm by year-end. So far, however, only 23.6% of the supply has come online, with deliveries historically lagging in the office sector.

This could help growth become more measured, with Grade A assets in established districts expected to continue outperforming, while older secondary stock could face increasing competitive pressure.