The real estate consultancy said blue-chip occupiers who had put real estate decisions and plans on hold in 2016 are now planning for a more active business cycle.
However it added that any potential upside in rental values is expected to be offset by the delivery of new Grade A space in the city while rents in Grade B buildings are expected to see marginal declines over the same period.
In Abu Dhabi and under the current market conditions, Knight Franks said it expects a delay in the delivery of commercial towers which is likely to prevent any further declines in rental rates.
“The slowdown in the UAE economy and subsequent cutbacks in the job market weighed in on the performance of the office market in 2016. In Dubai, while international occupiers remain committed to the region, they have chosen to restructure rather than expand their operations,” Knight Frank said in a report.
It added: “As a result, office rents across Grade A spaces in Dubai remained relatively stable. They continue to enjoy high occupancy rates given the limited availability of good quality stock in Freezones and around developed amenities and infrastructure. Meanwhile Grade B rents in secondary locations have dipped as landlords struggle to attract and retain tenants.”
In Abu Dhabi, Knight Frank said the drop in oil prices squeezed tenants in the oil and gas industry and the public sector who make up the bulk of corporate occupiers. This had a knock on effect on some professional services companies such as law firms and consultancies, who rely on work from government and related entities.
As a result, rental rates across the emirate declined as vacancies increased. However the impact has been less profound than expected, given the limited delivery of office space in 2016, the report added.
Knight Frank also said in the report that the retail market in Abu Dhabi and Dubai experienced further softening in 2016 as the strong dirham continued to dent retail sales.
It noted that this in turn exerted pressure on retailers’ ability to meet the high rental rates imposed. Consequently, a number of landlords have introduced flexible lease terms such as longer rent-free periods in order to retain their occupiers.
Well-established malls with higher footfall maintained healthy occupancy rates throughout 2016, indicating continued demand for units in prime locations. However the delivery of additional retail supply in 2016 is expected to put pressure on overall occupancy rates, it added.
The report said the general sentiment amongst retailers and mall operators is expected to remain cautionary in 2017, as consumer confidence is low amid job insecurities, and the higher cost of living has impacted residents’ purchasing powers.
In addition, the strengthening of the US dollar is showing little respite, particularly in light of further potential interest rate hikes in 2017. This will ultimately push the UAE dirham even further, making the country an expensive retail destination.
UAE shopping malls are also expected to experience further competitive pressures from online rivals, as more consumers embrace e-shopping, the report noted, adding that in Dubai, the strong supply pipeline is likely to weaken rents and potentially result in a market correction.