Prime office space is in high demand in Saudi Arabia as the kingdom saw a rise of 6.2% in Grade A lease rates in the first half of 2023, accompanied by a 97% occupancy rate.
Knight Frank reported on Tuesday the kingdom’s regional headquarters initiative — which requires multinationals to open regional headquarters within Saudi Arabia in order to be eligible for government agency contracts starting in 2024 — is a key driver behind the sharp uptick in lease rates as well as an exceptionally high rate of occupancy that has been described as an “anomaly.”
In its latest Saudi Commercial Market Review of H1 2023, the property consultancy also noted that the scarcity of prime Grade A office spaces in Riyadh is not only pushing businesses to opt for Grade B spaces, but also at more aggressively-priced rents. Grade B lease rates saw an increase of 17.3% at an average of $292 (SAR 1,050) per square metre.
“A perfect storm of office demand in Riyadh is supporting the rental growth being experienced across the market,” explained Faisal Durrani, partner and Head of Research, MENA at Knight Frank.
“Program HQ, combined [with] the emergence of new public-sector linked entities, rising rates of job creation as evidenced by the non-oil sector PMI readings and fall in unemployment levels, plus the rising tide of global businesses looking to expand or establish a presence in the kingdom, are together driving up rents and occupancy levels.”
“The root cause for the sustained uptick in demand stems from Vision 2030 and the economic transformation unfolding in the kingdom,” Durrani noted.
Knight Frank’s half-year review chimes in with previous trends, as well as forecasted expectations from earlier this year. Previously, occupancy rates for both Grade A and Grade B office rose to reach 90.6% and 76%, up from 87.8% and 74.6% respectively in 2021. The following year saw Grade A office space occupancy touch unprecedented levels at 98% as well as a 700% increase in demand, driven by an inflow of retail, construction, manufacturing, and hospitality.
This year, the trend continues, with office spaces leading the way, followed closely by a jump in hospitality and what may be an equilibrium in retail.
Demand outpacing supply for office space
Jeddah saw the sharpest rise of office rental rates in Grade A spaces at 12.7%; from an average of $277.5 (SAR1,041) per square metre in Q3 2022 to $320 (SAR1,200) per square metre in Q3 2023.
Meanwhile, though Riyadh’s Grade A saw modest gains at 6.2%, increased demand is reflected in the 17.3% increase in the demand for Grade B office spaces in the capital — a continuation from 2022. At the same time, Dammam’s office space market also saw modest gains at 5.2% and 3.3% for Grade A and B respectively in Q3 2023.
Occupancy continued to ride extremely high overall, but it remains to be seen whether it will remain at current levels as the supply of offices is forecasted to increase heading into 2025.
As demand continues to outpace supply, office space rents in Riyadh already touched record territory earlier this year, reportedly reaching as high as $560 (SAR2,100) per square metre in some highly desired buildings.
Retail: A mixed bag
Performance for retail lease rates remains a mixed bag, likely due to a shift to digital. Q3 2023 saw Riyadh break a streak of decreasing rates of regional and super regional mall rental rates with a 2.9% increase to arrive at an average of $726 (SAR2,723) per square metre. Jeddah’s saw a significant decrease at 5.7% during the same period. Meanwhile, Dammam’s retail space rents saw small decline, all with a stable and high occupancy rate year-on-year.
Hospitality: High revenues, high supply forecasts
As tourism continues to take off in the kingdom, the hospitality sector is also experiencing rapid growth in the number of hotel developments. Occupancy levels showed a marked improvement year-on-year as a greater number of domestic and international tourists are drawn to an expanding calendar of leisure and business events. Knight Frank cited official figures indicating that the kingdom welcomed 77 million domestic tourists and 16.5 million international visitors in 2022 alone, edging close to the objective of 150 million visitors set out in Vision 2030.
“This represents a substantial 50% increase from its prior target of 100 million tourists by the close of the decade,” says Turab Saleem, partner and Head of Hospitality, Tourism & Leisure Advisory at Knight Frank. “The demand for hotel rooms in Saudi Arabia remains robust, driven by seasonal events, festivals, corporate activities, and the continuous expansion of the country’s tourism sector.”
Year-on-year numbers show a marked increase across Riyadh, Jeddah, and Dammam, with revenues per available room increasing 17.6%, 18.9%, and 8.8% respectively despite only a modest rise in average daily rates in Riyadh and Jeddah and decline in Dammam. Meanwhile, occupancy rates across all three cities measured remained firmly between 58%-65%.
“Saudi Arabia currently boasts the world’s most extensive hotel development pipeline,” added Saleem, “encompassing approximately 289,000 new rooms slated for introduction by the conclusion of the year 2030. This figure nearly doubles the hotel room inventory of its neighbouring emirate, Dubai, which anticipates adding around 154,000 rooms.”
With an increasing inventory of hotel rooms, the kingdom hopes to cater to a greater influx of tourists by concurrently expanding the leisure and hospitality sector.
