Increasing supply amid lower demand is pushing down office lease rates in Saudi Arabia's two major cities.

According to the latest real estate report by KPMG Al Fozan & Partners, the trend is expected to continue, placing further pressure on rents and occupancies.

Riyadh is projected to see the completion of 190,000 sq of office space in 2019, taking the total stock of 4.5 million sq m by the end of the year.

The average occupancy rate for the Grade A office market reached 82 percent last year, but market performance has seen a declining trend in both rental and occupancy rates since 2017.

"The overall office supply would increase at a relatively lower rate than the historical rate owing to the oversupply conditions and the resulting decline in occupancies post-2021," said Firas Hassan, head of real estate at KPMG AL Fozan & Partners.

Meanwhile, Jeddah is expected to add more than 100,000 sq m of quality office space in the short term. The current stock of Grade A and Grade B office space is estimated to be 1.1 million sq m.

"A large proportion of Jeddah’s office stock is of Grade B quality, which leaves unmet demand for reasonably priced Grade A office space in the city. However, considering the forthcoming supply, we anticipate a measured shift of the supply composition towards Grade A office space," said Hassan.

Rental rates of Grade A offices saw a modest decline of four to five percent, while Grade B rents registered a drop of more than 10 percent. KPMG forecasts rentals to remain under pressure in the short to medium term.

However, new transport infrastructure developments in Jeddah are paving the way for a more connected city, which along with other mega-developments could positively impact future office demand, Hassan added.