Though many of Beirut’s 130 downtown office buildings are in need of tenants, its Grade A office sector is suffering the opposite problem. Most of the Beirut Central District’s (BCD) premium offices are fully occupied and the supply is badly in need of restocking, as few developers have delved into that risky terrain in the last few years.‘Grade A’ typically refers to those offices in prized locations that feature top of the range interiors, facilities and services, and the shortage of quality supply was a factor helping Beirut earn the dubious honor of being fourth most expensive city in the Middle East and North Africa for office rent in Cushman & Wakefield’s February report.
Office occupancy is at 75 percent in the BCD, the highest in a decade, according to Karim Makarem, director at Ramco real estate advisory. But most of the 100 to 250 square meter offices are unsuitable for multinationals and large firms, who typically look for 600 square meters of open floor space.
A source from Beirut’s Michael Dunn & Co. said that more than five multinationals have moved out of their Beirut offices in the last year. This was mainly because they were unable to find sufficient floor space serviced by the amenities they required with enough parking spaces for employees, forcing them to retreat to less costly suburbs such as Hazmieh, Sin El Fil and Mkalles.
Specific needs may also drive organizations to look outside the BCD: Abdullah Saleh, general manager of BrokersXP says a recent client, an Arab television station, needed an office with high ceilings and a good view for filming purposes. After viewing up to 15 premises in downtown, they opted for an office in Hazmieh on the outskirts of the city, where they found six-meter-high ceilings.
Bernard Mouchbahani, managing partner of corporate consultancy ProFinance expects areas such as Hazmieh and Sin El Fil to attract more commercial interest in the future and that Dbayeh will become a “middle class Solidere.”
But for firms like ServCorp, the world’s second largest provider of serviced offices, boasting a prestigious corporate address in downtown Beirut is a must. Barry Barakat, the firm’s general manager in the Middle East, says the country’s recent increase in construction activity and real estate prices convinced the management that demand for international services would pick up, and thus the company’s 95th branch was born in the BCD.
After settling into a 450 square meter office in downtown’s Louis Vuitton building last month, he told Executive: “In other cities, we would typically have a choice of three to five well known Grade A buildings to choose from. This was not the case in Beirut. [Compared to] the growth of Gulf Cooperation Council cities…the office sector in Lebanon has been somewhat stagnant.”
However, there is some hope on the horizon. The rate of construction for Grade A office buildings has picked up this year, after rents rose to a high of $400 per square meter annually from a market rate of $250 per square meter in 2009, according to Cushman & Wakefield’s 2010 second quarter report.
Brokers say the highest priced new constructions will be near the Starco and Bab Idriss areas of downtown. There, large firms are willing to shell out cash for what they consider to be Beirut’s prime office location: in downtown but comfortably distant from Parliament’s security upheavals and subsequent road closures.
Premium Projects is behind the upcoming eight-story Stratum office building near the Starco Center, designed by Australian architect Kevin Dash, who also designed the Bank Audi headquarters across the street. Ziad Karkaji, the group’s director of real estate, says that prices have doubled from around $3,500 to $6,750 per square meter in the sales-only project since they bought the 1,656 square meter plot in March of 2008. Some 90 percent of the grade A office building, to be completed by mid-2012, has been sold, he says, mostly to Lebanese companies who were operating in the Gulf and returned their headquarters to Lebanon after the financial crisis.
Stratum’s soon-to-be-neighbor, Developer Mouawad’s Palladium, is fully sold out. Marketer Foncia real estate consultants said the four office floors, ranging from 600 to 1,300 square meters in size, have all been leased to a single tenant. A representative from the Mikati-owned M1 group also confirmed their plan to complete a Grade A office building in three to four years on 25,000 square meters of built up area near the Starco building.
Ramco’s Makarem adds that there is a substitute to renting a downtown location: “Large, local companies come to us to look at alternatives such as buying land to develop their own office space or find other corporations [also] looking for large office space, so they can approach a developer together to get him to build what they want.”
Lebanese-Canadian Bank is building itself a nine-story $15 million high-tech headquarters on a 1,000 square meter plot in Martyr’s Square, while the Bank of Kuwait and the Arab World is erecting an 8-story, 10,000 square meter office on Foch Street, of which some 6,000 square meters will be rented out to tenants.
Although new construction will make Grade A office space more available, parking remains a major problem. “Even new office supply coming up is majorly lacking parking space. I know of some multinationals who want to move out because of this parking issue… it’s not enough for only the manager to have a parking spot,” says ProFinance’s Mouchbahani.
Saleh of BrokersXP concedes that scant parking in downtown affects all categories of offices. “It costs $120 per car per month to park at Beirut souks and 55,000LL [$36] per month to park at [the Beirut International Exhibition and Leisure Center (BIEL)],” he said, adding: “Now they made free transport every 15 minutes from BIEL to downtown for all downtown employees, but of course top managers won’t take the bus.”
Even existing supply is not being fully used, as the 40 parking spaces under each of several downtown office buildings must remain car-free due to security rules enacted in 2006.
The BCD municipality’s rules require only one parking space for every 60 square meters of retail space or 100 square meters of office space. International standards usually stipulate one spot per 15 square meters of gross leasable area, says Mouchbahani. Adding further pressure, he explains, is that the tenants of Grade A office buildings often try to economize on their investment by cramming their offices with workers, leaving a higher proportion without parking spaces.
The developer’s dilemma
According to Mouchbahani, part of the broader problem is that developers have shied away from building new offices because of their low yields, coupled with rising construction costs. “You need to rent it at $300 to $350 to make a 5 percent yield,” he says, suggesting they may be better off keeping their money in the bank earning interest. But these yields could be a smart investment, depending on the developer’s ability to finance the project and the expected capital appreciation.
Makarem says: “If you’re looking to develop property in downtown and not sell it, office space and their rentals would give higher yields than they would for residential. Yields for new offices vary between 5 and 6 percent, which is higher than residential property, which yields around 3 percent.”
Commenting on a recent trend whereby some developers chose to retain ownership of more than half of their office space, fearing inflation would chip away at their early profits, Mouchbahani believes prices in Solidere will remain stable for the next five years, following the continuous price rise since late 2008.
Demand and supply in this sector, or any other business sector, is heavily dependent on things we can’t depend on; though Beirut offers cheaper operating costs and higher-quality human capital compared to other Arab cities, both the political fluctuations and the lack of premium infrastructure hinders developers’ efforts.
Still, as ServCorp’s Barakat will tell you, Beirut is always a draw: “We have many Lebanese entrepreneurs expanding [their] business locations… as well as clients in our Jeddah, Kuwait, Doha and Dubai offices regularly asking us when we will open in Beirut.”