Dubai's office glut presents challenges

The total stock of office space in Dubai has increased around 140% between the end of 2007 and mid-2010, which is roughly about twice the level of absorption that the market has seen over the same period, the report said. Dubai is scheduled to add 19 million square feet of office space this year alone, which would increase current supply by 43%, although this figure is likely to be revised downwards based on actual completions.

Currently, Dubai holds the fourth largest ratio of supply per capita of any major global city (behind only New York, Paris and London) with around 34 square feet of office space per person. This figure is expected to increase to around 36 square feet per capita as a result of the additional supply scheduled for completion before the end of 2010.

'Dubai currently has one of the highest levels of office space per person in the world,' said Graham Coutts, Head of Management Services, Jones Lang LaSalle Mena. "This reflects the regional and global role of Dubai but does suggest that the level of supply has increased ahead of the maturity of the market."

Demand focused on Dubai CBD

Demand is currently focused on the central business districts of Dubai, specifically the financial centre and Tecom areas, which are currently experiencing vacancies less than one third of those in the overall market (12% compared to 38%).

Vacancy rates in the CBD will rise to a peak of between 30% and 40% over the next 12 to 18 months, but should fall to 10% to 15% by 2014, the report estimated. Outside of the CBD, vacancies are likely to remain at excessive levels for a number of years, and measures to restrict supply will be critical to the recovery of the emirate's office market.

"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.

The report suggests that developers should consider "mothballing" delayed projects, demolishing existing buildings, or converting office space to other uses. "Without radical moves to restrict future supply and remove some existing stock, it is likely that vacancies will remain at high levels in these locations, with many buildings having little or no prospect of attracting tenants in the foreseeable future," the report said.

The report points out that other emerging markets such as Shanghai and Singapore also experienced similar issues of oversupply and high vacancy rates, and their recoveries were assisted by the demolition or conversion of existing supply. Both of these markets saw significant reductions in the total stock of office space that contributed to falling vacancies in previous cycles.

Given the amount of oversupply that is projected for Dubai, the outlook is bright for prospective tenants in the near term. The study says Dubai's office market is likely to become increasingly "tenant-favourable" over the next 18 to 24 months, with vacancies rising further across the market. This will boost the competitiveness of the emirate and increase its attraction as the major business and financial hub of the Mena region, the report noted.