Dubai Is building Too Many Malls Even Though Its Economy Is Struggling

Ever since the fall of oil in Dubai five years ago, the hugely developed desert city is still struggling. But however it is not the same for the retail construction sector as it is flourishing. Dubai is a city in the desert which is largely infrastructurally developed with lustrous skyscrapers and wealthy foreigners accustomed to overflowing, air-conditioned shopping malls, however, they are suffering from an unforeseen problem in recent years like empty storefronts.

Dubai has tons of malls where visitors and locals can go shopping and sightseeing. The fancier malls are lavishly built with marble corridors sprinkled with luxury retailers and restaurants. Huge movie theaters, electric vehicle charging stations and health clinics are among the offerings meant to keep consumers inside and spend even more, not to mention that they even have an aquarium and an indoor ski slope.

However, oil prices fell five years ago from three-digit highs, this metropolitan area has been hurting ever since. Its fast pace of commercial and residential development outdone demand, and an increase in the value of dollar has made everything more expensive. Property prices across the United Arab Emirates have declined by about 27% since 2014, and the U.A.E.’s annual growth rate has reduced to less than 2 percent.

Never the less, this has not stop the rich city from booming. According to consultancy JLL, an adequate amount of new retail construction is expected in Dubai over the next two years to fill more than three Mall of Americas—some 16.5 million square feet that will increase the amount of retail space by about 40%.While destination malls and local shopping centers serving the city’s 3.3 million inhabitants are holding their own, the weak spot in Dubai’s retail sector (which makes up 26% of its gross domestic product) turns out to be its many regional malls. And whether additional, planned megamalls will be economically worthwhile remains a table talk.

The former CEO of Dubai real estate consulting firm Core Savills David Godchaux, the sluggish economy is hitting the middle layer of Dubai’s malls, which are also vulnerable to a growing e-commerce presence in the region. While the big and small retail venues may be doing just fine, Godchaux said, “Anything in between is actually struggling’’…’’Overbuilding and a slowing economy in Dubai has led to more signs that say shops and restaurants will be “coming soon”

The construction of dozens of malls in Dubai used to be a good for its economy. A decade ago, real estate analyst Simon Kennedy arrived from the U.K., he said he was shocked by how lucrative the city’s malls had become. “It was the easiest job for the in-house leasing team,” said Kennedy, who had absconded from Britain for a job with a Dubai developer. “They’d have a waiting list of 20, 30, 40 different types of tenants who just wanted a slice of it.” Sales were so good, he said, that landlords “could increase the rent by 10, 15% and they probably wouldn’t even notice.” Tenants happily paid their mall’s various service charges and marketing fees while even decorating their shops to the owner’s standards, Kennedy said.

Sadly for them, it was not the case by 2013, with oil topping $100 a barrel, Dubai was picked to host the 2020 World Expo. At the time of its selection, analysts were predicting annual growth would thought, ‘OK, great. I’m going to build a mall, and it’s going to be full as well,’” Godchaux said. “It doesn’t work like that.”

When the price of oil headed south, the tide of money began to recede. Now, unfinished buildings dot the Dubai skyline. Hussain Sajwani, chairman of Damac Properties PJSC, recently warned that all new home construction needs to stop for up to two years or Dubai will “see a disaster.”

About 19% of store space was vacant in the third quarter, up from 12% two years earlier, according to JLL. Rents have been decreasing by double digits since 2018. In September, the effects of the building spree were on blatant display in the city’s financial heart. Where tall buildings connect to a new $272 million retail corridor with space for about 200 stores, only two dozen were open. So, given this landscape, why would Dubai need more malls and even as big as three more Mall of Americas?

Godchaux explained that some developers have chosen to finish projects because, unlike a residential development, mall projects are difficult to scale back. “A mall is a mall or nothing; its zero or one,” he said. “Sometimes, because you’re very, very close to completion, it’s probably more beneficial to finish it.”

Never the less, Dubai’s prestigious malls remain popular and profitable. The Dubai Mall, one of the largest in the world, fueled a 6% rise in profits for owner Emaar Malls in the first nine months of 2019. Emaar said it’s planning more retail space to match “strong demand from both retailers and visitors.”

Nakheel, the government-owned company that developed Dubai’s artificial palm island, won’t start leasing at its giant Deira Mall for at least another two years, according to a person familiar with the matter. The mall was supposed to include 4 million square feet and open in 2021. Rebecca Rees, a spokeswoman for Nakheel, declined to comment.

Meanwhile, the government of Dubai, is taking steps to firm up the city’s property market. In September, the emirate’s ruler, Sheikh Mohammed Bin Rashid Al Maktoum, said a committee would balance property supply and demand to ensure that “semi-government real estate companies in Dubai won’t compete with private-sector investors.”

There are some signs that a turnaround may be coming. In April, Warren Buffett’s real estate brokerage opened an outpost in Dubai, and in September, government-owned Meraas Holding announced a $1.4 billion joint venture with Brookfield Asset Management that aims to take over some of the developer’s properties.