Riyadh, Jeddah office rents fall as supply surges: KPMG

Increasing supply amid lower demand is pushing down office lease rates in Saudi Arabia's two major cities, according to a report by KPMG Al Fozan & Partners.

Supply has exceeded demand, leading to an oversupply in the market. The trend is expected to continue, which is expected to put further pressure on rents and occupancies.

Riyadh is projected to witness the completion of 190,000 square metres (sqm) of office space in 2019, taking the total stock of 4.5 million sqm by year-end.

As the average occupancy rate for Grade A office market reached 82 percent last year, market performance has seen a declining trend in both rental and occupancy rates since 2017.

"The overall office supply would increase at a relatively lower rate than the historical rate owing to the oversupply conditions and the resulting decline in occupancies post-2021," said Firas Hassan, head of real estate at KPMG AL Fozan and partners.

Meanwhile, Jeddah is expected to get more than 100,000 square meters of quality office space in the short term. The current stock of Grade A and Grade B office space is estimated at 1.1 million square meters.

"A large proportion of Jeddah’s office stock is of Grade B quality, which leaves unmet demand for reasonably priced Grade A office space in the city. However, considering the forthcoming supply, we anticipate a measured shift of the supply composition towards Grade A office space," said Hassan.

Rental rates of Grade A offices saw a modest decline of four to five percent, while Grade B rents registered a drop of more than 10 percent. KPMG forecasts rentals to remain under pressure in short to medium term.

However, new transport infrastructure developments in Jeddah are paving the way for a more connected city, which along with other mega-developments could positively impact future office demand, Hassan added.