Core Savills’ David Godchaux discusses the capital’s office, industrial and retail markets
The office market has adjusted to the redundancies and office consolidations seen over the last two years and has reached a new equilibrium by stabilising at lower rental rates in most office districts. Due to the ongoing gradual recovery in oil prices, we are starting to see a marginal uptick of downstream oil & gas occupiers expanding or looking to upgrade existing units, while trading and construction sectors continue to be under pressure and are witnessing contraction in spatial requirements.
International first phase expansions in the office sector continue to be limited. Most ongoing office leasing activity is led by occupiers, particularly those with a stronger performance track record despite the current downturn, upgrading to better premises by locking attractive mid-long-term contracts. With landlords pushed to offer better terms in what is now a dominantly tenant-friendly market, rent-free periods, multiple check payments and contributions to fit-out are becoming increasingly commonplace.
Rents are forecast to remain under pressure across the board in 2018, while grade A assets are expected to be relatively resilient, due to limited stock availability and sustained underlying demand. Elsewhere, we expect tenant migration (for the reasons of either shifting to better premises or lowering operating expenditure) to cause rising vacancy levels and further rental drops.
This has led grade B buildings and older office districts to continue witnessing deflationary pressures. Landlords who have not adjusted to these evolving market conditions by either adjusting headline rents, upgrading building premises or offering further floor divisions are facing a standoff and losing tenants to better built premises offering flexible terms.
With government diversification measures starting to bear fruit, and subject to continued stability in oil prices, a potential economic recovery is expected to start in 2019. However, new spatial demand in the wake of this effect is predicted to be very gradual as occupiers optimise existing office space and remain cautious towards expansion.
Abu Dhabi’s industrial sector has witnessed a decline in rents over the period 2015-2017, largely attributed to the 2015/2016 fall in oil prices. Enquiries from oil & gas companies, which previously comprised a large share of total enquiries, unsurprisingly decreased significantly. Rents across all key industrial areas registered a decline of over 10% over this time period, with areas such as KIZAD, Abu Dhabi Airport Free Zone and Mussafah seeing rental declines of more than 16%.
The supply of high-quality warehouse space in Abu Dhabi continued to increase over 2015-2017. KIZAD, for example, offers strong infrastructure and continues to invest in increasing its terminal capacity, which is expected to grow from 2.5m containers to six million over the next few years. Phase two of KIZAD Logistics Park, launched in 2016 and adding 105 units over 118,965sqm to the market, achieved full occupancy after phase one. The Eco Logistics Park, launched by Masdar City, has also added approximately 10,916 sqm of GFA to the total supply of high quality industrial units and offers customised build to suit opportunities. A purpose-built facility by Honeywell already occupies half of the total plot.
An occupier sweet spot has emerged for properties offering flexible space, preferably warehouses with an option to have serviced offices (15-25sqm), enabling occupiers to test the market conditions and expand as they scale up operations.
Retail GLA in the capital is set to rise steadily over the next two years. Maryah Central, which is expected to add at least 785,000sqm to total supply, is nearing completion. Reem Mall, on the other hand, projected to bring a GLA of approximately 270,000sqm, is likely to be delayed beyond the projected opening in 2020.
Weak overall economic sentiment over the past two years, contractions in household incomes and limited discretionary spending have clearly affected the emirate’s retail sector. Deflationary pressures in the hospitality sector are also negatively affecting the retail market, given that tourist expenditure traditionally contributes a significant portion of Abu Dhabi’s overall retail spend.
Although tourists from other growing markets such as India and China have partially offset the contraction, the strong dollar continues to affect traditional source markets such as the UK,
mainland Europe and Russia and their expenditure levels. Despite overall weakness in the retail sector, prime and super regional malls appear to be more resilient than older regional and community malls. Many of those are finding it challenging to maintain occupancy levels as retailers increasingly prefer to position themselves in newer and larger retail spaces, which draw higher footfall due to their overall appeal as leisure destinations.
These underperforming older malls are expected to face further downward pressure on occupancy levels, footfall and rents as new retail space is handed over in the next three years. This is likely to lead to further divergence between rental rates for regional and community malls and prime and super regional malls, which already show a difference of almost $272 per sqm on average.
To avoid obsolescence, mall operators and asset managers of these older, weaker performing malls may look at proactive marketing strategies, optimising tenant mix while creating higher engagement with shoppers, and in turn increasing footfall. Retailers in this softened market are carrying higher risk on the back of shrinking profit margins.
To maintain occupancy levels and viability, mall operators may resort to easing tenancy terms in line with revenue generation (linking rents to tenant revenue). Re-strategising marketing initiatives with a higher focus on social media, branding and public outreach, taking into account the affordability and demographics of the catchment areas, is expected to have a positive impact on footfall.