Riyadh | 14th November 2022: Unprecedented demand for prime office space in Riyadh has taken Grade A office occupancy levels to 98%, according to the latest analysis by global real estate consultancy, Knight Frank.
Faisal Durrani, Partner – Head of Middle East Research, explained: “As the Kingdom’s economic transformation plan unfolds, business activity is rising at an extraordinary pace. 70 firms have now committed to relocating their regional HQ’s to Riyadh, including Aldeham Education Group (AEG) and French rolling stock manufacturer Alstom.
“The number of foreign investment licenses issued during Q2 was nearly 700% up on last year, led by retail, construction, manufacturing, hotels and F&B and business services companies, all of whom are contributing to the record level of office requirements we are recording. Separately, FDI levels hit SAR 3.5 billion during Q2, across 49 deals, up from 37 in Q1, which alone has created 2,000 new jobs which will inevitably filter through to the office market in the form of new space requirements”.
Andrew Love, Partner – Head of Occupier-Landlord Strategy & Solutions and Head of Middle East Capital Markets added: “Unsurprisingly, office lease rates continue to climb in the wake of growing demand. Indeed, average lease rates for prime office space have increased by 18% over the past 12 months to approximately SAR 1,775 psm.
Occupancy levels stand at 98%, up by 4 percentage points on this time last year, underscoring the depth of demand. The heightened level of requirements means landlords are firmly in the driving seat”.
Durrani continued, “Grade B rents are also on the increase as occupiers jostle for space in the Saudi capital. With limited Grade A options, many are either turning to the Grade B market, while others are exploring build-to-suit options. Average Grade B rents are up 10% in the last year. High requirement levels in prime commercial locations such as King Fahad Road and Olaya Street have lifted Grade B rents here by 6%, while city-wide Grade B occupancy levels now stand at 75%; the highest level in at least five years”.
Echoing Riyadh, Knight Frank says, Jeddah’s office market has also been experiencing a resurgence in requirements as multinational and domestic businesses ramp up their presence in Saudi Arabia’s second largest city. As is the case elsewhere in the world, the focus is on best-in-class Grade A offices, however the lack of supply and rising costs mean many businesses are exploring Grade B space as well.
Grade A office rents stand at around SAR 1065 psm, reflecting a 6.5% increase on this time last year. Grade B rents have increased by 8.5% over the same period. Vacancy levels continue to edge downward, standing at 8% for Grade A offices and c. 20% for Grade B buildings.
The positive economic sentiment has also impacted office demand in the Eastern Province. Rising requirements for offices in the Dammam Metropolitan Area (DMA) has driven up lease rates for Grade A space by 5% in the last 12 months to SAR 950 psm. With the demand focused on best-in-class space, Grade A occupancy levels have edged up to 77%, from 73% last Autumn.
In addition to Riyadh Season, the return of a variety of events previously suspended due to the pandemic is sustaining and boosting visitor arrivals. For instance, the recent Riyadh International Book Fair, widely promoted as Saudi’s largest cultural event, attracted over 1 million visitors from across the nation. Contributing to improving occupancy rates in the capital’s hotels. Furthermore, rising activity amongst international corporates relocating or expanding their presence in Riyadh has also boosted business travel.
Turab Saleem, Partner – Head of Hospitality, Tourism and Leisure, Knight Frank, explained: “Looking forward, with the recent launch of the third edition of Riyadh Season, we expect the strong demand for hotel rooms this winter. Additionally, as noted above, with rising business travel, room rates are expected to continue rising across the city.
“To cater to the growing demand and as part of the economic transformation plans, a myriad of new hotel offerings are being planned to accommodate the government’s forecast increase in visitor numbers. We expect the total number of hotel rooms to rise by around 25% to 25,800 keys by the end of 2024, with over half of the upcoming supply expected to be internationally branded and operated”.
Durrani added: “Rising domestic tourism and a growing number of attractions and events across Saudi is already helping to boost tourist numbers. In fact, so far this year, Saudi cities feature in four of the world’s 10 busiest air routes: Cairo-Jeddah is the world’s busiest passenger route, followed by Dubai-Riyadh. Dubai-Jeddah is in sixth place and Cairo-Riyadh is ninth.
“Elsewhere, the resumption of Jeddah Season has had a positive impact on the city’s hotel performance. The latest edition of the entertainment extravaganza, which stretched for three months during the summer attracted over 5 million visitors to the city, drawn in by the 2,800 scheduled entertainment and cultural events”.
Besides the main entertainment season, several smaller events are also emerging throughout the year, such as the second edition of the Saudi Coffee Festival, which is contributing to the city’s appeal amongst domestic tourists. This of course in addition to the usual demand from the 2.5 million pilgrims that arrive in the holy cities of Makkah and Madinah each year for religious pilgrimage.
Knight Frank adds that of the total new licenses that were awarded to new foreign investment projects in Q2 2022, 60% are within the wholesale and retail trade sector. The appetite of international retailers to operate and enter the Saudi market continues to strengthen, with a preference for physical stores in shopping.
Some retailers are also rapidly establishing Saudi-specific online platforms to tap into the boom in online shopping in the wake of the pandemic. Indeed, the Saudi Central Bank reported recently that the value of online transactions nationally has risen 77% since the start of the pandemic.
“As consumer preferences change, most retailers are gravitating towards new, trendier locations such as Jeddah’s Atelier La Vie and City Yard. This pivoting of demand is prompting some landlords of older retail units in the Red Sea city to incentivise existing tenants to renew leases in situ by offering rental discounts. Others are using the increasing vacancy levels to refurbish their properties, while also incorporating F&B outlets, or entertainment – some through pop-up events – to cater to a wider range of customers, most of whom are seeking lifestyle destinations where shopping is almost a secondary priority, behind leisure and entertainment offerings”, Durrani concluded.