The office real estate market in Saudi Arabia continues to be dominated by a lack of Grade A stock, despite the steady growth in its supply pipeline.
That’s according to the latest Office Market Review from Knight Frank, which revealed a number of notable commercial office transactions throughout 2018, as key occupiers both from the public and private sector look to expand or move to upgraded premises.
In terms of performance, market-wide rents and occupancy levels have been under pressure since 2016, with the trend continuing into 2018 amid increasing levels of supply and subdued occupier demand.
Key prime schemes continued to perform better than the market average as a result of a lack of high quality stock. However, a major headwind is that a large portion of upcoming supply falls within this category, which could put pressure on performance in this segment.
Against the backdrop of a highly elastic supply dynamic, rents for Grade B assets are softening further in the short term, where buildings that suffer from poor accessibility and parking arrangements will struggle for occupancy.
Despite an improvement in business sentiment in 2018, the report outlines that any increase in demand will remain subdued in the short term, with rents and occupancy likely to remain under pressure as increased demand will be met with new supply.
As a result, vacancy rates can be expected to rise placing downward pressure on rents. In this context, it is expected landlords will continue offering incentives in order to maintain occupancy levels amid an increasingly competitive market.
Longer term, it is envisaged that demand for office space will pick up from current levels as economic reforms under the National Transformation Program (NTP) and Vision 2030 start feeding through the wider economy, translating into an acceleration of growth in the non-oil private sector. Moreover, the implementation of various urban regeneration initiatives, including mixed-use communities and large-scale infrastructure projects, is expected to act as a catalyst for the real estate market.
Furthermore, it is expected that the planned wave of privatisation in Saudi Arabia will boost investment and foster growth in the business environment, creating favourable conditions for the office sector.
Saud Sulaymani, partner at Knight Frank Saudi Arabia, said: “Going forward, the implementation of various urban regeneration programs, mixed use communities, and large scale infrastructure projects is expected to act as a catalyst for the real estate market in the kingdom.”