Overview KSA | Offices 2018

Transformative Trends The Office Market in Ian Albert Regional Director | Middle East & North Africa [email protected] Introduction

The Kingdom of Saudi Arabia is witnessing an evolution of product offerings across its office market. This is evidenced by the recent entrance of themed office parks and the announcement of a forthcoming supply of integrated mixed-use developments across major cities. The key driving factors behind the changes are a Imad Damrah combination of changing market dynamics (shifting focus Managing Director | Saudi Arabia to cost savings and hence the need for differentiated and [email protected] efficient products) and evolving tenant preferences.

This transformation of the KSA office market is expected to be influenced by both global and local trends, leading to fundamental changes in the real estate landscape. The most significant change in the last 5 to 10 years has been flexible and co-working space, in addition to several mega transportation / railway projects that were recently initiated, with some nearing completion. This paves way for opportunities arising from Transit Oriented Developments (TODs). Nawaf Saymeh Director - Advisory & Investment Strategy | Saudi Arabia Strong government initiatives and an expansive [email protected] population structure underpins the market for real estate development opportunities. The Saudi Vision 2030 and National Transformation Program (NTP) place a focus on the diversification of the economy. Recent news to support the government’s commitment behind this initiative include the establishment of the General Authority for Small and Medium Enterprises (SMEs) and a c. SAR 72 billion private sector stimulus package. This package is part of the SAR 200 billion, four-year program, announced in 2016 to spur the private sector’s Fouad Abou Rafeh growth and raise the rate of job creation. Saudi Arabia’s Associate Director - Advisory Services | Saudi Arabia 2018 SAR 978 billion fiscal budget outlines an increase in [email protected] projected spending to record levels, resulting in positive market sentiment.

This paper focuses on the office market within Saudi Arabia’s major cities: Riyadh, Jeddah and Dammam / Al Khobar (DAK). The paper also highlights key characteristics, challenges / opportunities and outlook for each city. Recent and upcoming trends that are expected to shape the office market in the coming years are investigated.

Sameer Mujtaba Manager - Advisory Services | Saudi Arabia [email protected]

02 Office Trends | Overview | Saudi Arabia Office Trends | Overview | Saudi Arabia 03 The Changing DNA of Offices Different Types of The Flexible Co-work Spaces Workspace in KSA: Dynamic-Trends By the end of 2017, it was estimated that nearly 1.2 million people worldwide had worked in a coworking This paper will highlight the trends that will design, and construction changes. The change space. impact the KSA office market in the coming is expected to have an impact at every level – years. These trends are expected to change from interior workspace layout / design, building There has been considerable the landscape of the office market in the major construction, to the overall shifts to the commercial international investment in coworking cities, along with revolutionizing the workspace business districts and landscape. companies such as WeWork (founded in 2010) which does both coworking and flexible space, currently manages 10 million square feet of office space globally and is in 23 cities in the USA and 21 countries worldwide.

>> Young generation of Saudis >> International Companies / >> Mega transportation projects For ASIA PAC Region alone – across (new mindset) Identity Competition / Evolving across all major cities. Flexible desk, Team Table, Meeting Table some of the major cities the take-up Tenant Preferences from flexible workspace operators has >> Technological advancements >> Saudi Vision 2030: focus on accounted for 40% of the overall market (cloud computing, tablets etc.) >> Higher requirement for facilities transportation projects in the past year (2017). This growth is CHANGE DRIVERS (e.g. from women driving) driven by the need for flexibility from >> Global Influence and higher awareness of multinational , evidenced by environment/ rising utility costs the percentage of deals for 15 desks or more increasing to 48% in 2017 from 32% in 2016, which in turn was up from 12% in 2014.

In KSA serviced offices providers such as Servcorp and Regus have established a presence for several years over multiple office buildings in major cities in the Kingdom. In addition >> Collaborative and flexible >> Prime differentiated office >> Integrated offices Shared Space, Cubicle Desk, Private Office, Meeting Room to this, we are now starting to see more MAJOR TRENDS work spaces space with high level of within transit oriented trendy and creative type of shared facilities, branding and developments office space. sustainability elements Some co-working spaces and business incubators targeting specifically women are also emerging.

>> Reduction in the office space >> Movement towards quality >> Creation of new CBDs within requirements office space (i.e. “drive the cities towards quality of life”) >> Creative and flexible >> Open up new commercial workspace >> Energy efficient / LEEDS pockets of the city certified >> Growth of serviced and >> Offers attractive development virtual offices (co-working >> Technologically advanced / opportunities while delivering spaces) SMART building benefits to residents; Dedicated Desk, Meeting Space OFFICE MARKET OFFICE >> Business incubators EXPECTED IMPACT ON KSA ON KSA IMPACT EXPECTED targeting young Pricing is calculated according to the needs of the company that allows entrepreneurs flexibility ranging from hourly or daily rentals, to weekly and monthly.

04 Office Trends | Overview | Saudi Arabia Office Trends | Overview | Saudi Arabia 05 Office Market Change

Drivers: A Closer Look Mega projects and Mega privatization plans Factor Result Projects >> Expected to create new cities / business centres and more demand over medium to long term

Ambitious plans to open up the local Entrance of market and attract international international companies. They will require quality offering, with facilities and high-safety Movement towards quality companies measures. >> Downward price pressure on non-distinguished Movement towards offices quality >> Lead to more integrated office spaces >> Need to offer facilities, amenities, and community As outlined in the Saudi Vision 2030, to achieve maximum premiums on office rates Government the private sector’s contribution to the emphasis on economy is expected to increase, which will likely lead to stimulated demand for private sector office space in the future. Prominent family businesses in older funding office buildings Occupied old >> Largely due to sentimental attachment buildings >> Expected to eventually move out from aged Largely-driven by a millennial buildings - creating new demand for office space workforce, there is a growing emphasis Young population on the provision and design of public entering realms, workplace interconnectedness, smart offices, architecture and workforce branding. Corporates Corporates divesting real estate assets divesting >> More flexibility and efficient office spaces to be As outlined in the Saudi real estate demanded Vision 2030, greater attention is being paid to SMEs, which will likely result in greater demand Young Saudi for smaller, flexible and competitively- entrepreneurs priced office space. This segment will make an attractive target for business incubators. Approval of Approval of privatization program privatization >> Growth in private sector contribution to the GDP, program hence, more demand for office spaces. This year women will start driving in the Kingdom. This will eventually add pressure to the parking requirements Women driving of office buildings. Existing office buildings with inadequate parking will be pressured more, and will likely have to give more concessions to attract or keep tenants.

06 Office Trends | Overview | Saudi Arabia Office Trends | Overview | Saudi Arabia 07 Riyadh’s quality office space is located along Performance primary CBDs, such as King Fahd Road and Outlook Olaya Street, featuring a number of high-rise, 22% The completion of key transit- prime-grade office towers. The city also has infrastructure projects is expected to RIYADH 51% several upcoming / tertiary CBDs comprising of create demand for office developments 27% Grade B offices (some part of larger commercial that enjoy direct integration with multi- Prime office modal transportation services. developments plazas). account for Large forthcoming supply will challenge approximately half the performance of existing premium Riyadh Premium Grade A Grade B and grade A developments, through of Riyadh’s quality increasing vacancies and pressure on office stock market wide lease and market wide gap.

Arising opportunities will cater to c. 4.1 million sqm King Fahd Rd changes in workforce composition (more Office Characteristics women) and niche markets (e.g. more Riyadh’s office market has experienced a dynamic inclusive office space, SMEs, Startups, shift over the last years, driven by the introduction etc.), through offices located within of mega mixed-use masterplans and high quality quality mixed use developments offering office developments. 10 75% suitable facilities and amenities, and 70% ample parking provisions. 8 68% Prince Turki Rd Demand for office space within Riyadh is driven Northern Ring Rd

Millions SQM 65% Some of these TODs in the future may by its stature as the Kingdom’s business capital. 6 70% Olaya Rd King Abdullah Rd be near universities. These are often Historically, office space was mainly purpose-built, 65% owner-occupied and highly-dependent on the public 4 a good source of SME and co-working 60% 62% 60% Eastern Ring Rd space users as they draw directly from sector’s needs. Going forward, Colliers expects 2 59% 57% 55% Riyadh’s office market to be driven by the private the Universities. Mid-size companies use sector and autonomous, non-government bodies. 0 50% students and the university facilities to 2018 2019 2020 2021 2022 support their growth and research.

Supply Market Wide Occupancy Key Challenges/ In April 2018 Arriyadh Development Opportunities Authority (ADA) has announced official >> The office sector is expecting significant TOD zones for Riyadh (within 800m of each station). The map highlights the increases in supply as large scale developments PREMIUM GRADE A GRADE B such as KAFD & ITCC (Digital City) enter the key potential TOD hotspots only. market. SAR 1,100-1,500 SAR 850-950 SAR 700-750 >> This large forthcoming premium supply is % 85-90 % 80-85 % 60-65 expected to add pressure on lease rates and occupancy levels. >> Market is expected to experience a “flight to An opportunity lies in the development of quality” (movement from lower grade office Key identified large-scale upcoming office projects include King Primary CBD small-scale quality offices and mixed-use office Abdullah Financial District (KAFD), Information Technology and space to higher grade), so pressure on lease Secondary CBD Communications Complex (ITCC), Riyadh Front and King Saud developments that feature a variety of supporting rates is expected to be higher on lower grade Tertiary CBD University Endowment (KSUE). This forthcoming supply over the components, designed to cater to the evolving needs offerings. Metro projection period is expected to total 1.25m sqm of GLA (out of which of businesses. Opportunity for TODs in the short to >> As part of the Saudi Vision 2030: the large private KAFD will be c. 865,000 sqm). sector stimulus and active government focus on Key Potential TOD Hotspots medium term. raising the rate of job creation is expected to lead to higher demand for office space. >> Mega transportation projects: Riyadh metro / bus system (under construction) to to unlock TOD opportunities.

08 Office Trends | Overview | Saudi Arabia Office Trends | Overview | Saudi Arabia 09 Jeddah’s office market is represented by several Performance business corridors. Zoning regulations and building height restrictions have limited the 13% 21% Outlook concentration of office space to two primary CBDs (i.e. Prince Mohammed Bin Abdulaziz Jeddah’s office market has experienced JEDDAH Street and Al Madinah Road). However, recent stronger performance than the In the future, the Kingdom’s other major cities, which is 66% relaxation on height allowances has led to the composition of Jeddah’s mainly due to the city’s limited supply of Grade A and Premium office space. office stock is expected emergence of new CBDs. to gradually shift towards Premium Grade A Grade B The office stock is expected to gradually Jeddah higher quality (Grade A) shift to higher quality and more differentiated offerings (e.g. office parks, developments offices in mixed use developments, etc.), Office Characteristics given the type of upcoming supply and c. 2.0 million sqm current lack of it in the market. This shift Jeddah is less dependent on the oil & gas is expected to have an adverse impact industry and more so on religious tourism, trade on older, lower quality office space.

and logistics, manufacturing, and agriculture. Prince Sultan St Some of the upcoming TOD hotspots It has one of the region’s busiest seaports are expected to be within proximity and has experienced sustained growth in the 2.5 88% to universities and / or hospitals as business sector over the past few decades. Rapid 87% 87% 87% supporting research drivers. urbanization, coupled with the growth of the local 2.0

Millions SQM 86%

economy has led to the emergence of a large Rd Corniche 1.5 middle-class, which has in-turn fueled demand for 85% 85% 85%

Al Madinah Rd office space. 1.0 84% 83% 83%

Sari St 0.5 Rd Abdulaziz King 82% Key Challenges/ 0 81% 2018 2019 2020 2021 2022 Opportunities Prince Mohammed Bin Abdulaziz St Supply Market Wide Occupancy >> Lack of well identified business districts and Palestine St more scattered “business corridors”. King Abdullah St >> Oversupply of office space – lower quality, unidentified supply within residential PREMIUM GRADE A GRADE B neighborhoods. These are starting to be targeted for closure by the municipality. SAR 1,100-1,300 SAR 900-1,000 SAR 700-800 >> Supply is dominated by lower quality % 88-90 % 85-88 % 80-85 Primary CBD developments. Majority of existing Grade A Secondary CBD offices have limited supporting components and Tertiary CBD facilities/amenities. HHSR >> Several prominent family businesses occupying Jeddah Metro older Grade C buildings (some over 30 years of In addition to a cluster of upcoming standard Grade B developments age). Eventually, they will be looking for newer along future business corridors (such as Northern Prince Sultan Key Potential TOD Hotspots An opportunity exists in introducing prime quality office space and this will create demand. Street and King Abdulaziz Road), forthcoming key projects include extension of Jeddah Chamber of Commerce & Industry (JCCI), office space and business parks, as well as office >> Several mega transportation projects to create Business Avenue and offices within masterplans Al Raidah, Emaar space within mixed use developments. High opportunities: Square, KAIA City and Kingdom City. The total confirmed and under opportunity for TODs in the short to medium term. • Haramain Expressway (in testing phase) construction supply over the projection period is approximately 241,000 sqm of GLA. • Expansion of KAIA Airport / Airport City • Jeddah Metro (in planning phase)

10 Office Trends | Overview | Saudi Arabia Office Trends | Overview | Saudi Arabia 11 Dammam & Al Khobar’s office market is Performance represented by several CBDs, out of which approximately half are tertiary (and composed DAMMAM Outlook & AL KHOBAR 31% mainly of lower Grade B and Grade C office Grade B office 46% space - offered as part of larger commercial Opportunities will likely arise within developments plazas). the change in workforce composition (more females working in the workforce characterize Dammam 23% and Saudization policies), as demand & Al Khobar’s office Khaleej Rd increases on the development of supply – this is expected facilities and services (altered common areas that cater to males and females). Dammam & Al Khobar to change, as there is Premium Grade A Grade B a gradual shift towards International companies and the nature Office Characteristics higher quality office King Fahd Rd of oil and gas projects would drive the developments emergence of flexible space as a key Dammam & Al Khobar’s office market is primarily office component. This further supports driven by its oil industry, as Dhahran is home to the greater amenities in office buildings the state-owned oil company, Saudi Aramco. It is desired by international tenants. also an industrial and logistics hub, which houses c. 1.5 million sqm three public industrial cities, the Kingdom’s second largest seaport (King Abdullah Port), and King Fahad International Airport. King Faisal Rd

Key Challenges/ 2.0 77% 77%

Opportunities 76% 76% 1.5 Rd Saud King >> Historically, the required office space was purpose- Millions SQM 75% 75% built and owner-occupied, while residential villas 1.0 were used as office spaces. Similar to Jeddah, the 74% 74% 74%

majority of Dammam & Al Khobar’s office supply is 0.5 73% Primary CBD characterized with limited amenities and average Secondary CBD build and mid-service quality. 0 72% 2018 2019 2020 2021 2022 >> Latent demand from prominent family businesses Tertiary CBD Supply Market Wide Occupancy which will eventually move out from current, Corniche Rd deteriorating buildings. >> The recent newer office developments provide Potential Opportunities excellent supporting facilities and amenities.

>> Upcoming CBDs account for approximately 46% PREMIUM GRADE A GRADE B of the DAK’s office stock, the majority of which Phased quality office developments, over the mid comprises Grade B office developments. SAR 1,000-1,100 SAR 650-750 SAR 450-500 to long term, are likely a viable strategy. Dammam >> No mega transportation projects are % 65-70 % 73-78 % 70-74 currently under construction. However, Metro and GCC Rail way (both under early GCC railway is expected to connect through planning stages) could open up TOD opportunities Dammam & Al Khobar and initial plans for an Key upcoming office developments include Abdul Karim Tower, Abdul airport city are underway. Hadi Tower, The Business Quarter, as well as King Fahad University of Petroleum and Minerals (KFUPM) Business Park. Forthcoming supply will be in the region of 125,000 sqm GLA (excluding 128,000 sqm of KFUPM – which is still under the planning stage).

12 Office Trends | Overview | Saudi Arabia Office Trends | Overview | Saudi Arabia 13 Transformative Trends: Offices as Part of Transit Oriented Developments

Global Look Global example: Marina Bay Area,

Upon full completion of the TOD, the area is expected Workspace to more than double the office space for the city. Revolution

Global examples: BCG Headquarters – NYC, USA & Station F - ,

Iconic corporate headquarters, such as BCG’s Hudson Yard HQ, feature a rich variety of ancillary services designed to attract and retain talent by creating an accommodative working environment that fosters creativity and shared learning experiences. The facility offers many different services to its tenants such as a gym, a wellness centre, a A TOD development is typically anchored at the concierge desk, meeting rooms core by the station. With the core and center mainly and conference halls, and a Hi-Tech and Energy Efficient being retail and commercial offices. The edge would variety of resaurants and cafes. Buildings usually be more focused around residential. Station F: Startup Campus Result: Potential shift of commercial business Modern coworking campus Global example: Al Bahr – Abu Dhabi, UAE districts and concentration of prime office space to targeting startups: areas within 800m of key metro locations. 34,000 sq meters Combined, the Al Bahr (in Abu Dhabi) two towers 3000+ desks in the startup zone include 2,098 geometric, moveable solar protectors What will drive this in KSA? 26 international startup programs (Mashrabiya shading system), each weighing 1.5 1 makerspace tons, projected 2.8 meters off the buildings’ surface, >> Mega transportation projects (Haramain Railway, 1 restaurant, 4 kitchens, 1 café that track the sun’s movement and reduce interior Jeddah Metro, Riyadh Metro) 24/7 access heat by up to 50% compared to conventional high- >> Government announcement on Riyadh Metro 8 event spaces rise buildings TODs.

What will drive this in KSA? One of the first towers in the Gulf Region to receive a LEED Silver Rating, partly-driven by the >> Young generation of Saudis (new photovoltaic cell’s ability to generate 5% of the mindset) towers’ total energy requirements. >> Technological advancements (cloud computing, tablets etc.) What will drive this in KSA? >> Business incubators (for women and men both) >> Rising utility prices >> Global influence >> Companies focus on cost savings >> International brands entering the market >> Seeking LEEDS certification Saudi Vision 2030: focus on energy saving

14 Office Trends | Overview | Saudi Arabia Office Trends | Overview | Saudi Arabia 15

Transit Oriented G Elements of

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e h A special type of Mixed-use m c e a development Development: Transit Oriented k m i n l a Development g i c Transit Oriented Developments can be defined as n a mixed use communities developed around central in transportation systems such as an airport, railway F and metro station. These developments are typically T high density and have vibrant communities. This e development type was successfully introduced in North ch America, Europe and Asia, while several TOD projects n ol are in the supply pipeline of the Middle East region. og se y ca se ss TOD Influence Area lec ine tion bus Solid

800m 500m 185m Characteristics of TODs

Transit Oriented Developments - benefits Pedestrian Spatial Focal Point Parking Quality and opportunities: Friendly Arrangement Ideally, the transit In order to The transit system as station should be attract external well as the associated >> It will link underdeveloped areas within the city The development In order to prevent sprawl, the focal point of visitors, parking commercial and residential should benefit the high density residential >> Open up new pockets of the city and introduce fast the development should be facilities should be from high offerings (i.e. Apartments, paced change and thus be easily strategically developed and managed quality footpaths Duplexes, etc.) should be >> Focus on CBDs accessible and located and well to maintain best possible and prevent located in the immediate visible. managed. standards. >> Offers attractive development opportunities while congestion. vicinity of the transit station. delivering benefits to residents; It’s inherently sustainable >> Generally more dense than regular masterplans

16 Office Trends | Overview | Saudi Arabia Office Trends | Overview | Saudi Arabia 17 Critical Success Factors Conclusion

What do you need As account for the bulk of the future workforce, office The impact of the transformative trends is clear: the in the real estate landscape. The following outlines the spaces are adapting to their needs for greater connectivity, open market is expected to undergo dramatic changes over the key office characteristics – both from a physical building to succeed? environments, flexibility and ancillary services. coming years. Hand in hand with the global trends, Saudi and location perspective, that are expected to be most Vision 2030 is expected to help accelerate the change attractive to office occupiers in the coming years:

As seen in the Performance section of this report – the changing market dynamics and recent market challenges have led to downward pressure on pricing and occupancy/absorption within the office sector. Cities such as Riyadh are facing bigger challenges than others. >> Design >> Physical >> Efficiency >> Image >> Organizational >> Diversity However, it is important to note that certain office >> Brand >> Transportation >> Amenities developments are more resilient to the changing Differentiation Connectivity Concentration conditions as evidenced by their sustained performance (or very minor impact). These factors can be summarized into two main categories:

>> Location factors Within Themed Office Park >> Office characteristics / offering Flexibility & These common elements between what is still >> Greenery >> Flexibility >> Common Quality Design doing well in the market, despite the challenges, is >> Thinking >> Adaptability Space LOCATION FACTORS highlighted to the right – all successful developments Rooms >> Property >> Retail Outlets Facilities Branding have capitalized on some of these factors. Management >> Wellness and Amenities Within Mixed-use Development Restoration Performance Community The following factors are ff particular influence: SMART Higher Office Offices/ “Grade” Characteristics LEED >> Higher “Grade” Offering: Changing tenant offering Certification preferences and higher proportion of international

companies entering the market places more Public Close to TransportationParking – Spaces emphasis on “image” and quality of office space. Proximity to upcoming metros will be advantageous (beginning with Solutions and Virtual Riyadh Metro): Rising utility prices and the associated economic and Transit Oriented Development offices >> Flexibility: Changing market dynamics mean that health costs of private transportation are likely to encourage greater companies are always resizing themselves, and use of public transport, which will likely benefit transit oriented Tenant therefore require flexibility in offering. This could be developments. Services Business District both in terms of shorter-term contracts (or virtual offices), as well as smaller, more efficient layouts. Furthermore, the use of public transport (particularly the metro) is Within Primary Commercial expected to increase, as a result of: >> Supporting Facilities and Amenities: These are >> The recent hike in the Kingdom’s gasoline prices gaining importance due to the young workforce and >> Offering a less stressful mode of transport, compared to their work preferences (i.e. to be close to retail/F&B, automobiles etc.). Furthermore, parking will become a critical issue once women start to drive. Developments with ample parking space will have an advantage and command a premium over those with less.

>> Location Factors: Location along primary CBDs has always been a key success factor. However, emerging CBDs with higher connectivity are attractive. Future transport projects are expected to open up other areas for opportunities within TODs.

18 Office Trends | Overview | Saudi Arabia Office Trends | Overview | Saudi Arabia 19 For further information, please contact: Operating from Imad Damrah Managing Director 69 countries on MAIN +966 11 273 7775 MOBILE +966 50 417 2178 continents [email protected] 6 Nawaf Saymeh Director Main: +966 11 273 7775 $2.7 billion Mobile: +966 55 327 7761 [email protected] in annual revenue Fouad Abou Rafeh 2 billion Associate Director MAIN +966 12 610 5900 square feet under management Mobile: +966 55 035 9970 [email protected]

15,400 Sameer Mujtaba professionals and staff Manager MAIN +966 12 610 5900 $116 billion Mobile: +966 55 999 1643 [email protected] transaction value

Colliers International

Al Faisalah Tower Riyadh | Kingdom of Saudi Arabia MAIN +966 11 273 7775

Jameel Square Jeddah | Kingdom of Saudi Arabia MAIN +966 12 610 5900

Colliers International Saudi Arabia

Colliers International is a global leader in commercial real estate services, with over 15,400 professionals operating from 69 countries. A subsidiary of FirstService , Colliers International delivers a full range of services to real estate users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world. colliers.com/saudiarabia