Dubai Sees Need for Tallest Office Tower Amid 45% Vacancy

In Dubai, where almost half of the offices sit empty, the head of a state-owned business zone says there’s room to build the world’s tallest office tower.

Ahmed Bin Sulayem, chairman of the Dubai Multi Commodities Centre, said the Persian Gulf business hub can still attract tenants and investors with such a project because many of its buildings are unsuitable for large businesses. Bin Sulayem helped lead the development of the DMCC’s 68-story Almas Tower, Dubai’s tallest building when it was completed in 2007. The tower’s full and has a waiting list for tenants, he said.

“The crisis has shown us that well-designed and thought out developments will always hold value and demand,” Bin Sulayem, 35, said in an interview in the Almas Tower. “We will be running out of space and the world’s tallest commercial tower will help attract more companies.”

Dubai’s speculation-driven property boom saddled the Persian Gulf sheikhdom with thousands of offices that are unattractive to businesses because of their design, location or ownership. Companies looking for at least 5,000 square meters (54,000 square feet) are frequently unable to find what they want and are increasingly looking for “built-to-suit” deals, broker Jones Lang LaSalle Inc. said in an April 14 report. About 45 percent of the city’s offices are empty, according to CBRE Group Inc., another broker.

For Sale

The skyscraper at DMCC would be at least 520 meters (1,706 feet) tall and stand at the center of a 107,000 square-meter development that will include commercial buildings for companies that require their own facilities, said Matthew Lomax, director of property at DMCC. The free-zone authority plans to sell part of the tower, to be built over five years at a cost of about $1 billion, and keep the rest to generate rental income.

“We will go around and make sure that multinationals are aware of this building before we go to the rest,” Bin Sulayem said. “They tend to need large space and plan expansion years in advance.”

The cranes won’t be going up anytime soon. The skyscraper has yet to be designed, a contractor hasn’t been commissioned and financing hasn’t been secured. Funding will probably come from advance sales as well as loans and Islamic bonds, the chairman said.

DMCC is in talks with “seven serious banks, and we have a number of international banks that want a piece of it,” Bin Sulayem said. He said investors have called him about buying 25 floors in the tower, even before a design is available.

High Inefficiency

The need for big corporate office spaces doesn’t justify a project like the one DMCC envisions, said Matthew Green, head of United Arab Emirates research at CBRE. The higher costs of building a tall tower force the owner to ask for higher rents and selling prices, he said.

“Why the tallest tower?” he said. “It’s going to be inefficient and there’s no point in building an inefficient building in a great location. Corporate occupiers are not looking to spend fantastic amounts of money.”

Rent and prices aside, many corporate occupiers shy away from high towers and that’s driving demand for low-rise business parks in locations such as TECOM, Meydan and Silicon Oasis, said Craig Plumb, head of Middle East and North Africa research at Jones Lang.

“While some corporates will consider taking a number of floors in large high rise towers, others would prefer low to mid-rise premises where they are the sole or at least the major occupier,” he said.

Ambitious Projects

Bin Sulayem’s ambitions mirror those of Dubai developers and political leaders, who have announced megaprojects ranging from the world’s highest Ferris Wheel to a Taj Mahal replica bigger than the original in the last 12 months. Few if any details have been provided on how the plans will be financed.

As with the residential market, Dubai’s office boom from 2002 to mid-2008 was driven by investment in yet-to-be-built properties by buyers who frequently resold the contracts to turn a quick profit. Much of the real estate was sold floor-by-floor, under a system known as strata title, and ended up with small investors with little experience in managing commercial property, CBRE’s Green said.

Dubai’s central business district has an office vacancy rate of 31 percent, the world’s highest until neighboring Abu Dhabi’s rate rose to 38 percent several months ago, Jones Lang’s Plumb said. Mumbai has a vacancy rate of 25 percent while Boston and Chicago trail with 20 percent and 18 percent respectively, he said. About 15 percent of Moscow’s central business district is unoccupied and the rate is 13 percent in Frankfurt and Shanghai.

Glut Grows

Vacancies across the city probably will rise to 50 percent by the end of 2015 as developers fulfilling contracts signed during the boom add 1.7 million square meters of space, Green said. About 1.4 million square meters of office space, or 19 percent of current supply, will be added in Dubai by the end of 2015, Jones Lang LaSalle estimates.

While undesirable locations, faulty floor plans, inefficient designs and lack of parking are all cited as reasons for the high vacancy rate, strata titles may be the most significant cause. Almost 65 percent of the space that’s being completed through 2015 will have that ownership structure, which large tenants find unattractive because they have to deal with several owners with different rent demands and standards for maintaining the property, he said.

Fruitless Search

Standard Chartered Plc, the U.K.’s second-largest lender by market value, searched for more than two years in Dubai before deciding to build its own 13-story tower in 2011, when the vacancy rate across the city was 40 percent. Robin Pugh of Jones Lang, who assisted with the search, said most buildings weren’t suitable because of the strata titles.

Dubai has pulled off record-setting projects. Emaar Properties PJSC sold all the residential space in the Burj Khalifa, the world’s tallest building, before it was completed in 2010 and it’s currently expanding the Dubai Mall, already the world’s largest by area. Palm Jumeirah, the tree-shaped artificial island built by Nakheel PJSC, commands some of the city’s highest home prices and the company this year announced a plan to build 102 beachfront villas on the island.

Almas, which means diamond in Arabic, is the 13th-tallest office building in the world, according to a ranking by the Council on Tall buildings and Urban Habitat. It shares the spot with the Pinnacle in Guangzhou. Taiwan’s Taipei 101 is the world’s highest commercial tower with 508 meters and 101 floors.

Free Zone

The proposed new tower for the DMCC would have the advantage of being in an area that offers companies tax-free status for 50 years with no restrictions on capital repatriation and simpler regulation. Dubai has set up several of the districts for specific industries, known as free zones, where companies can retain 100 percent ownership. Outside the areas, companies can only operate if they are majority-owned by U.A.E. citizens.

DMCC, which operates a free zone with more than 7,000 businesses, requires companies operating in the business park to take offices there. It also doesn’t allow tenants to take space if they’re not companies registered with the zone, a policy the chairman said prevents speculation. DMCC has 27 towers that include commercial space within the Jumeirah Lake Towers Free Zone on Dubai’s main Sheikh Zayed Road.

Bin Sulayem has overseen the expansion of the DMCC from a gold trading zone to include exchanges for diamonds, tea and pearls as well as the construction of the Almas Tower. His first job at the DMCC Authority was to manage the start of the project in 2001 and he served as chief operating officer when the tower was commissioned and built. He became DMCC chairman in 2011.

Tall towers are usually designed for multiple uses because developers “don’t want to put all their eggs in one basket,” Bin Sulayem said. “But for us, office is what we do.”

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