Saudi office space glut dampens demand in H1: Knight Frank

Strong demand for office space during H1-2015 in Saudi Arabia’s major cities of Riyadh and Jeddah was offset by an oversupply, leading to unchanged rental and vacancy rates, according to Knight Frank, a global property consultancy.

According to the IMF’s latest forecasts, GDP growth in Saudi Arabia will slow to three percent in 2015 and 2.7 percent in 2016, after appearing to have strengthened over the first half of 2015 due to a pickup in consumer spending after public sector workers received a bonus following King Salman’s accession to the throne in January.

Demand for office space in the kingdom has been traditionally driven by mega government projects.

After the completion of King Abdullah Financial District (KAFD) and the Information Technology and Communications Complex in Riyadh, an additional 800,000 square meters of office space will be available in the market. But as more options become available, customers are expected to demand premium quality office space, Knight Frank said in its Saudi Arabia Office Market Update.

“Going forward, we believe that mixed-use master planned developments will be able to command premium rents and benefit from robust occupancy; while standalone, poorly located commercial developments will see increased vacancy rates and falling rents,” the consultancy said.

Grade A and B office rents in Riyadh stood at SAR 1,300 and SAR 900 per square meter a year, respectively. In the Red Sea city of Jeddah, west of the kingdom, the rents for grade A and B were at SAR 1,200 and SAR 700 a square meter a year.

In the Eastern Province, demand for office space was flat in the year to June 2015. Grade A and B office yearly rents stood at SAR 1,050 and SAR 700 a square meter, respectively. They are anticipated to remain stable, albeit might slightly increase, as landlords refuse to negotiate lower rents in the face of higher supply.

“As primary and secondary commercial centers across the Kingdom continue to develop, the location, positioning and delivery of future office product will become increasingly important,” Stefan Burch, partner at Knight Frank Saudi Arabia, noted in the report.