Office market in Saudi Arabia flat as new completions offset higher demand

Annual office take up in key Saudi Arabian cities is continuing to rise but higher demand is offset by new office completions, according to the latest report into the country’s commercial property market.

In Riyadh and Jeddah in the 12 months to June 2015 this resulted in vacancy rates remaining broadly stable over the same period and rents were also unchanged in the two cities.

The analysis from international real estate firm Knight Frank also shows that in the first half of 2015 Grade A and B office rental values in the capital stood at SAR1,300 and SAR900 per square metre per annum, respectively.

Meanwhile, Grade A at SAR1,200 per square metre per annum and Grade B at SAR700 per square metre per annum rents in Jeddah were also flat.

In Eastern Province, demand for office space was flat in the 12 months to June 2015 and the report points out that there is little to indicate that demand will rise in the near term, suggesting that the completion of new office projects will exert upward pressure on vacancy rates.

However, with landlords in the market largely insensitive to changing supply demand dynamics, it is suggests it is difficult to see rents budging from their current levels of SAR1,050 for Grade A offices and SAR700 for Grade B offices.

The report says that the current supply of Grade A and Grade B office stock in Riyadh stands at 3.5 million square meters, the majority of which is concentrated in the central and northern parts of the city.

‘Due to current dynamics we do not expect the market as a whole to see increased vacancy rates or a reduction in achievable rental rates as demand for quality commercial spaces that are well located and benefit from good floor plates will remain strong in the short to medium term,’ it adds.

Supply of office space in Jeddah currently stands at 820,000 square meters with over 100,000 square meters of office supply due to be added to the market in the short term. As a result of construction delays, the first half of the year saw few completions which resulted in market wide vacancy rates remaining stable at 10%.

Total stock is expected to exceed 1 million square meters in the medium term as new supply comes online and the report says that the second half of the year will see additional supply coming from a number of small to medium sized projects.

‘Due to the historic lack of Grade A stock in the market, we see robust demand for good quality offerings in the short to medium term as tenants look to upgrade to better quality premises and the non-oil economy continues to show healthy growth,’ the report adds.

Whilst the Eastern Province does not benefit from a well-defined CBD, supply looks set to grow with a number of projects under construction due to be released to the market between the fourth quarter of 2015 and the second quarter of 2016, the report explains.

Knight Frank expects the Eastern Province to continue to be dominated by Grade B stock, leaving it some way behind the more established markets of Riyadh and Jeddah. ‘As a result of future stock coming to the market, we expect vacancy rates to tick up by the end of this year,’ it adds.

Rental rates in the Eastern Province have remained flat throughout the first half of 2015, a trend the firm expects will continue in the short term as new stock counteracts any future increase in demand. ‘However with the release of new stock to the market, we believe that the quality of offerings will improve with the better schemes able to command premium rents over ageing, poorly located schemes,’ it adds.