Saudi Arabia Office Real Estate Market - Growth, Trends, COVId-19 Impact, And Forecast (2023-2028)

The size of Saudi Arabia's Office Real Estate market is USD 7.23 billion in the current year and is anticipated to register a CAGR of over 8.12% during the forecast period

Key Highlights

• The market is driven by the government initiatives like VISION 2030, and allied programs attracting investors to enter the market. Furthermore, commercial and retail space demand especially for Grade-A offices is increasing post-pandemic driving the market.
• According to the head of global real estate services firm Jones Lang LaSalle, Saudi Arabia's retail sector saw an increase in retail space and a strong recovery in domestic demand following the relaxation of pandemic restrictions in the first half of 2022. Firms that planned to open new offices are making a comeback. As a result, demand for office real estate is increasing, as evidenced by rising occupancy rates in Grade A buildings. At the moment, office rates are extremely high and the rents are also witnessing significant growth. Demand for retail shops is also increasing and malls, in particular, are reporting high levels of footfall.
• The term "electronic commerce" refers to the sale of electronic goods. Despite a lack of availability, the Saudi office market remains centred on Riyadh. There was an increase in the occupier requirements in Jeddah and to a lesser degree in Dammam and Khobar. In the 12 months to September 2022, Riyadh's Grade A office rents increased by 5.9%, while Grade B rents increased by 3.5%. Dammam and Khobar in the Eastern Province both saw increases in Grade A offices of 3.9% and 8.2%, respectively. The office market in Jeddah increased by 8.2% year on year in the third quarter of 2022, while Grade B remained stable.
• Riyadh, Saudi Arabia's capital and commercial hub, is well-positioned to benefit from the region's overall commercial activities. In contrast to previous performance, the Riyadh office market saw a solid increase in rental prices for both Grade A and B sectors in the first half of 2022. International companies with operations in Saudi Arabia are also expected to relocate their headquarters there by 2024. This is in line with the Regional Headquarters Program. This is expected to contribute to a continued upward trend in Riyadh's office market, particularly in the Grade A segment, in the medium term. As a result, it can be anticipated that there will be increased demand for office space.
• Saudi Arabia's office sector saw an increase in performance over the last year, fueled by a variety of government mandates that drew a significant number of international firms to the country. A large proportion of this demand was accounted for by the government and related entities, striving to achieve the goals outlined in the Vision 2030 strategy. With the government showing no signs of slowing down its efforts to meet the lofty goals outlined in Vision 2030, investors can expect a steady and rising demand for commercial real estate in the Kingdom's major cities over the next year. This demand is expected to be strongest in the increasingly commercialised cities of Riyadh and Jeddah, where rental yields are among the highest in the country.

Saudi Arabia Office Real Estate Market Trends

Increasing Demand for Office Spaces in Key Commercial Cities

Despite a lack of availability, the Saudi office market remains centered on Riyadh. Increased demand for occupiers in Jeddah, and to a lesser extent in Dammam and Khobar. In the 12 months to September 2022, Riyadh's Grade A office rents increased by 5.9%, while Grade B rents increased by 3.5%. As a result, demand for office real estate is increasing, as evidenced by rising occupancy rates in Grade A buildings. The Saudi real estate industry's momentum toward decarbonization and transparency has propelled the country to the top 50 most transparent real estate markets in the world.

In both Riyadh and Jeddah, demand is robust for offices that have a wider provision of facilities (such as F&B outlets within buildings) and projects with flexible floorplates to cater to a range of tenant requirements. In the first half of this year, DMA activity levels remained relatively low, with no significant changes in rents or vacancy rates recorded. Office rental values in Makkah fell by about 3% year on year. In the short term, we expect occupiers in both office markets to maintain a strong negotiating position.

Increase in Retail Sector backed by Government Initiatives

As the largest market in the GCC and characterized by a strong consumer base with high disposable income, Saudi Arabia's retail market has managed to bounce back from the effects of the pandemic. The retail market has shown signs of stability in the first half of 2022, following a subdued performance in 2020-21 due to the pandemic. However, it will take some time to get back on track, owing to increased market competition, which is putting downward pressure on rental rates. Combining retail with other complementary real estate components such as entertainment, hotel, office, or residential could be a good idea for increasing foot traffic. As Riyadh establishes itself as a premier tourist destination, an influx of inbound and domestic tourists can be expected.

Saudi Arabia's real estate market could boom in the next ten years, attracting investors attracted to the Kingdom by the government's multibillion-dollar economic projects like NEOM. The country is attempting to reinvent its economy with its Vision2030 plan, which aims to diversify the country's income away from oil revenues by investing in industries such as esports and video gaming, as well as the development of the futuristic city NEOM. As a result, the value of the country's real estate market may rise, and property investors may flock to the country.

With USD 1 trillion slated for real estate and infrastructure project development, the Kingdom of Saudi Arabia (KSA) will see sustained property market growth, fueled by Vision 2030 and the Iskan program. At least eight new cities are planned, primarily along the Red Sea coast. Many projects are also planned for existing major cities. Riyadh's population is expected to exceed 15 million by 2030, with the ambitious goal of becoming one of the world's ten largest cities. The retail property market in Saudi Arabia has a lot of long-term growth potential. Real estate will gain from various new programmes to provide local housing and invigorate the business and financial sectors via investments in commercial real estate.

It's also worth noting that landlords have been implementing various strategies to attract and retain tenants, such as incorporating F&B and entertainment facilities into their retail centres to increase footfall. Currently, developments with such positioning outperform the market in terms of occupancy and footfall.

Saudi Arabia Office Real Estate Market Competitor Analysis

The Saudi Arabia Office Real Estate Market is fragmented with the presence of a large number of local and regional players, as well as real estate consultancy firms. The major players include SEDCO Development, Kingdom Holding Company, Kingdom Holding Company, and many others. The major share of the market comprises local and regional players. While the companies are trying to construct more grade-A offices as the demand is soaring due to investment by global players entering the country and establishing their offices.

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