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Dubai faces warehouse shortage amid new business influx

High demand, low supply: Dubai faces warehouse shortage amid new business influx - Logistics Middle East

Dubai is facing a shortage of warehouse space, as the city witnesses an influx of new businesses and the continual expansion of existing companies’ operations, according to a Knight Frank report released on Thursday.

According to the Dubai and Abu Dhabi Industrial Markets Review for the third quarter of 2023, issued by the global property consultancy, the supply of under-construction warehouse stock in Dubai’s industrial market currently stands at just 1.56 million square feet.

The report highlighted that demand is outstripping supply, with occupiers facing the prospect of leasing secondary stock, while others are gravitating towards locations in Abu Dhabi, which is benefitting from spillover demand. 

Across Abu Dhabi’s six primary submarkets tracked by Knight Frank, rents have remained steady during the second half of 2023, with high occupancy levels in KEZAD and Masdar contributing to sustaining rents. 

Moreover, the report highlighted a spike in demand in ADAFZ, where space is available for $163 (AED600) per square metre.

To meet the growing demand, ADAFZ is developing a new masterplan, Al Falah Free Zone, spanning over six square kilometres, and encompassing both bonded and non-bonded zones.

Between the first (Q1) and third quarters (Q3) of 2023, Dubai recorded 9.9 million square feet of new requirements, with the logistics sector dominating the demand, accounting for 44% of new requirements, followed by the manufacturing & industry at 16% and the technology sector at 13%. 

In Abu Dhabi, new industrial and logistics space requirements surged to 350,000 square metres, during the first nine months (9M) of 2023, marking a significant 94% increase compared to the same period in 2022.

“Demand has been strong this year and we have worked with several new market entrants from Asia Pacific, CIS countries, Turkey, and India. Additionally, existing industrial occupiers have also been busy expanding their footprints in Dubai,” Knight Frank’s Associate Partner and Co-Head of Industrial and Logistics, Maxim Talmatchi said, adding that this surge in demand has spurred local and international developers to explore opportunities to enter the market with Grade A logistics build-to-rent products.

The report further forecasted that approximately nine to 10 million square feet of Grade A logistics warehousing will be delivered in the next 10 years.

While warehouse lease rates in Dubai have remained stable during H2 2023, Grade B rents in JAFZA—$7 (AED25) per square foot—and Dubai Industrial City —$9 (AED32) per square foot—have risen by 25% and 19%, respectively, compared to the same period last year.

Market transition
Al Quoz (Grade A) has seen rents climb to 52% above January 2020 levels, positioning the area as the most expensive warehouse leasing location in Dubai, particularly with retailers, fitness and wellness businesses, cafes and art galleries increasingly using the warehouses as retail premises.

“For industrial occupiers, Al Quoz’s central location between old and new Dubai continues to fuel demand, especially among occupiers from the logistics (last-mile centres) and automotive sectors,” Faisal Durrani, Partner and  Head of Research—MENA said, noting that the ongoing transition of stock from warehousing to retail in this core location is anticipated to drive up rents further, given the high 98% occupancy levels and restricted supply in the wider market for light industrial units.

Future outlook
The report further revealed that despite an influx of institutional investments from the US, driven by the UAE’s strategic location, e-commerce growth, and the need for efficient supply chain solutions, Dubai faces a shortage of prime industrial and logistics land, stressing the importance of expansion plans by authorities such as DIP and JAFZA.

Furthermore, the report projects a continued upward trajectory for Dubai’s industrial rents, driven by the acute supply shortage, combined with Dubai’s ambitious D33 Economic Agenda and Vision 2040 Strategy. This growth, however, does not come devoid of risks.

According to the report, heightened investor demand is boosting capital values faster than lease rates, which is compressing yields, with projections of a modest decline in yields from 8.50- 8.75% in H1 to around 8.0-8.25% by the end of 2023. 

Moreover, interest rate hikes are expected to dampen demand for industrial assets, due to the increased debt costs, which could potentially slow, or even reverse yield compression.

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