Demand for warehouses in Dubai exceeds supply

Knight Frank's latest Industrial Markets Report in Dubai and Abu Dhabi – 2023 Review shows that the total outstanding warehouse area still under construction in the Dubai Industrial Market is only 1.56 million square feet.

According to Knight Frank, demand exceeds supply and tenants face the prospect of renting out more secondary inventory, while some are turning to locations in Abu Dhabi, which are benefiting from excess demand.

According to Knight Frank's analysis, all six industrial sub-markets in Dubai saw rental stability during the second half of 2023, demonstrating the continuation of the positive city-wide trend.

High occupancy levels in KIZAD and Masdar have led to stable rents and increased demand in Abu Dhabi Airports Free Zone, and Knight Frank also points to high demand in the Abu Dhabi Free Zone Zone, where space is available for AED 600 per square metre. To meet the growing demand, Abu Dhabi Airports Free Zone is developing a new masterplan, Al Falah Free Zone, which spans over 6 square kilometres, which will include customs and non-tariff zones.

Sources of demand

Dubai recorded 9.9 million square feet of new requirements during the first quarter to the third quarter of 2023, according to Knight Frank Dubai's logistics sector leads demand at 44%, followed by manufacturing and industry (16%) and technology (13%) On the other hand, requirements for new industrial and logistics spaces in Abu Dhabi increased to 350,000 square meters during the first nine months of 2023, a significant increase of 94% compared to the same period in 2022.

Maxim Talmachi, Associate Partner and Co-Head of Industry and Logistics, says: "As we approach the end of 2023, the industrial and logistics market has become a dynamic landscape with multiple opportunities and challenges. We have worked with many new market participants from the Asia-Pacific region, CIS countries, Turkey and India as they seek to explore business opportunities and industrial spaces, and we have seen the expansion of existing occupants in Dubai.
"This continuous increase in demand has motivated both local and international developers to explore opportunities to enter the market with leasing products designed to build top-tier logistics warehouses. We expect to deliver approximately 9-10 million square feet of top-tier logistics warehouses in the next 10 years."

The Knight Frank report also notes that warehouse rental prices in Dubai remain flat so far during the second half of 2023, but rental prices for Tier 2 in Jebel Ali Free Zone (AED 25 per square foot) and Dubai Industrial City (AED 32 per square foot) have increased by 25% and 19% respectively, compared to the same period last year. Similarly, Al Quoz (Category I) saw a 52% rise above January 2020 levels, making it the most expensive warehouse rental location in Dubai.

Faisal Durrani, Partner and Head of Research in the Middle East and North Africa, commented: "The transformation of the Al Quoz region continues. With rental rates steady at AED 58 per sqft, retail stores, which include many fitness and wellness businesses, cafes and art galleries, continue to acquire warehouses for retail space, contributing to the artistic atmosphere that has become integral in this part of the city."
"For users of industrial spaces, Al Quoz's central location between Old and New Dubai continues to support demand, especially among companies in the logistics sector (last end centers) and the automotive industry. The shift from storage to retail in this strategic location remains a catalyst for rent increases here, especially when the occupancy rate for light industry units in the public market is around 98% and supply is so limited."

Market Outlook

According to Knight Frank, the market in Dubai is witnessing a significant influx of institutional investment from the United States, as a result of the strategic location of the UAE, the growth of e-commerce activity, and the growing need for efficient supply chain solutions. However, Dubai faces challenges stemming from a shortage of key industrial and logistical land, highlighting the importance of expansion plans adopted by authorities, such as the Dubai Industrial Zone and the Jebel Ali Free Trade Zone.
Knight Frank expects industrial rents in Dubai to maintain their upward trajectory. This optimism stems from severe supply shortages and is reinforced by Dubai's ambitious economic agenda and Vision 2040 strategy. 

Adam Wynn, Associate Partner and Co-Head of Industry and Logistics in the UAE, commented: "Over the next 12-16 months, as the market continues to evolve, we expect to narrow the gap between primary and secondary levels, and industrial and logistics leases to expand. Tenants remain heavily dedicated to securing the best world-class dedicated warehouses, and are now willing to pay more to occupy these spaces, which has not happened historically.

Due to the limited supply entering the market, landlords seeking to invest in capital expenditure to modify or modernize their old assets will have the opportunity to receive a concessional lease premium. On the other hand, while secondary asset holders may be able to maintain occupancy rates in the short period by entering the final supply to market, these assets will face an unstable period of time."

Knight Frank also highlights key market risks: Increased demand from investors is boosting capital values at a faster pace than rental prices, putting pressure on yields. Knight Frank expects yields to have fallen from around 8.50-8.75% in the first half of 2023 to approximately 8.0-8.25% by the end of the year..
In addition, raising interest rates may reduce demand for industrial assets, given the increased cost of debt. This may slow down or even reverse the compression of returns.