Dubai witnessed one of the largest increases in net effective cost to occupiers of prime office space in the third quarter of 2022 as fit-out costs in key office markets around the world have continued to climb with inflation, rising an average of 10 per cent.

Dubai’s net effective cost to occupiers of prime office space stood at $108.7 in Q3, up three per cent quarter-on-quarter, according to Savills latest Prime Office Costs (SPOC) analysis.

Demand for office space has been concentrated across prime properties, leading to limited availability and an increase in rents. An increase in fit-out costs due to inflationary pressures has further contributed to the overall increase in occupancy cost, said Swapnil Pillai, associate director – Research at Savills Middle East.

“The UAE economy is projected to grow around 6 -7 per cent in 2022, making it one of the high-growth markets in the world. Economic growth combined with the government’s push towards diversification and policy changes to promote business and long-term residence has led to strong interest from corporates to expand in or enter the UAE,” said Pillai.

According to property consultants JLL, the cost of leasing offices in Dubai is expected to rise significantly over the next several months due to supply constraints in the market. The rent increases over the next 12 months are more likely in double digits, as strong demand has been outpacing supply significantly. Dubai’s office market had a total stock of 9.1 million square metres of gross leasable area (GLA), according to JLL’s research. The supply is expected to grow before the end of the year, with an additional 53,000 square metres scheduled for delivery in the fourth quarter.

According to Savills, overall the markets which have seen the largest increases in net effective costs over the quarter ended September are largely clustered in the EMEA (Europe, Middle East and Africa) region, including Dublin (+7.0 per cent), London City (+5 per cent), Dubai (+3.0 per cent), and Berlin (+3.0 per cent).

Fit-out cost inflation varies slightly by region, says Savills, from 14 per cent year-on-year (YOY) on average in EMEA, to 9.0 per cent YOY in Asia Pacific and 7.0 per cent year-on-year in North America, as global supply chain issues have affected all markets, albeit to varying degrees.

Rental rises have seen much greater variation. European and Middle Eastern prime CBD office markets have seen an increase in average gross rents of 6.0 per cent over the past year, due to both index-linked rental increases and higher energy costs, which are often factored into service charges. Furthermore, low vacancy rates in the core markets have supported an increase in asking rents, especially in the Middle East.

Matthew Fitzgerald, director of Savills EMEA Tenant Advisory, said in the third quarter occupiers really started to feel the effects of rising inflation in both fit-out and rental costs, particularly in EMEA which is recording the highest average rises in both. “It’s unfortunate that these price rises come at a time when more needs to be spent on ‘green’ buildings and retrofitting existing stock to match the demand for more sustainable property, which creates complexity when considering long-term options.”

“Supply chain disruption and rising costs for materials and labour are leading to higher fit-out costs and longer construction times, at a time when occupiers are looking to create dynamic spaces to attract and retain the best and brightest talent. The role and function of office spaces continue to be challenged and reimagined by real estate teams and business management, something that persists in creating uncertainty in office markets around the globe,” Savills said.

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