Circa 2007, Dubai was literally and figuratively the hot spot on the map. The city's massive office towers, hotels and master-planned communities were poised to propel its development community into the future. But even this super-charged market had to

answer to the cruel mistress of time and the vicissitudes of the global economy. "Dubai thought trees grew to the moon,'' explains Mike Straneva, partner & Americas director at Ernst & Young. "It just doesn't happen."

Sitting on the Arabian Peninsula of the Persian Gulf, the United Arab Emirate of Dubai surged into public consciousness with its ambitious developments during the boom years. Web searches exploded seeking renderings of the Burj Dubai (now Burj Khalifa), the world's tallest building, and the Palm Jumeirah, a master-planned community of man-made islands in the shape of palm trees that is visible from space.

"Overall, Dubai was really a hot market,'' says Straneva. "It started off five years ago as a second- home and travel alternative for Europeans, and accelerated." Consequently, construction was rampant.

According to Jones Lang LaSalle, by the end of Q1'1 0 there was approximately 46 million square feet of office stock in the Dubai market, by the end of 20 11 an additional 30 million square feet will have arrived. As of the end of December 2009, the hotel supply topped out at 42,154 rooms. By the end of 2010, five hotels are expected to be completed: Armani Hotel, Pullman MOE, Amwaj Rotana, Sofitel and Ottoman Palace, for an additional 1800 keys. As for malls, Dubai added four million square feet of retail space between 2009 and 2010 alone.

Investors poured capital into the emirate for myriad reasons at the time. Matthew Green, who heads research and consultancy in the UAE for CB Richard Ellis, explains, "There was a lot of money flowing into Dubai for investment purposes, not only for real estate, but also hot money just flowing in with speculation around the potential of the dihram, the currency, as well." The champagne was flowing, but even Cristalloses its fizz after a while.

"Just around Thanksgiving and the trailing weeks of 2008, things deteriorated significantly on the issues surrounding the debt structure of Dubai World,'' notes Sam Chandan. chief global economist for Real Capital Analytics. Dubai World was the developer and driving force behind the proposed Burj Dubai, which now completed and renamed the Burj Khalifa, is officially the world's tallest skyscraper. Its money troubles are emblematic of the problems Dubai began encountering.

The Amazonian cash-flow-which went into investments as well as the stock market in 2007-virtually disappeared by the third and fourth quarters of 2008. "You had a period where everyone was cashing in on every investment they had in Dubai and, largely, within the region,'' Green says. The quick vanishing act of capital quickly and negatively impacted the burgeoning powerhouse. "People who had invested in stocks and shares were taking money out to cover losses in home countries, and real estate people

were trying to sell assets based on their profits here."

Many of the mega-projects in the nouveau-riche metropolis are now frozen, while some lesser developments may never see the light of day. Nakheel got the first and smallest of the three Palm Islands, Palm Jumeirah, operating as a livable community. However development of the Palm Jebel Ali is on hold indefinitely and the largest component, the Palm Deira, hasn't moved past the master planning and site work stages. Meanwhile, the

Burj Dubai was halted temporarily as Dubai World sought completion funding, which it eventually received in the form of a $23.5-billion restructuring plan from Abu Dhabi, leading to the name change. Still, questions regarding its possible vacancy are weighing quite heavily on the market.

"There are aspects of the long term debt restructuring that are still in process." Chandan says. "That remains one of the impediments to normal market activity." Not to mention that the market isn't exactly clamoring right now for completed office space.

"We believe that vacancy has increased significantly in the past 12 months and is likely to continue to increase because there is a great deal of supply still coming into the market." explains Arthur de Haast, global CEO at Jones Lang LaSalle Hotels and head of the firm's international capital markets group. In fact, JLL estimates that citywide vacancy is clocking in at 35% and expects to see that figure increase to 45% by year's end. This will no doubt hamper construction recovery.

"Both in the data and the anecdote, there is an abundance of space available." Chandan explains. "Until we see a meaningful resumption of economic and business activity, we're hard-pressed to make the case that Dubai needs more space."

Dubai's construction boom, however, did more than simply create palm-shaped developments and Olympian towers. Many of these creations were built in tandem with a revamping of the area's infrastructure. And though the Dubai Roads and Transport Authority has scaled down its marine transport projects and shelved its public ferry service project indefinitely in response to the global financial crisis and the delays in the development of projects like the Palms, most of the infrastructure improvements cannot be undone.

"Dubai has the best infrastructure within the region,'' Green notes. "It has the new metro system, the best hotels, the best malls, the highest percentage of retail brands and

the biggest corporate occupiers." The expansion of its airports and investment in Emirate Airlines has made Dubai a hub for Europeans traveling to Australia and Asia, as well. "People previously would have gone through London or Amsterdam or Frankfurt,'' de Haast says.

The good news for the emirate is, although retail revenue is down about 30% from 2009, JLL is expecting to see sales revenue increase by 3% to 5% by the end of 20 1 o. Meanwhile, hotels reporting a drop in RevPAR from 2009 are still running a robust 70% occupancy rate. "It's by no means blood in the water as far as hospitality is concerned,'' de Haast says. "And a lot of the market was driven by hospitality, which feeds into retail as well."

Chandan sees a slow and modest recovery with growth in 2011 and 2012 with trade activity from places such as India leading to more growth. Interestingly, he notes that the downturn might have been good for Dubai in the long run. "The competitiveness has been enhanced over the course of the past year,'' he explains. "It's a much more affordable place to locate than it was in 2007 or 2008. That, correction which has improved its competitive position in the region, will allow for an earlier and healthier return to growth."

Green sees local and foreign investors alike eyeing Dubai for investment opportunities, perhaps leaning toward unsold, under-funded projects that present a more advantageous sale opportunity upon completion. And with some asset values dropping as much as 50%, there will be opportunities, if investors can reconcile a few outstanding regional issues.

"It's not exactly the most transparent of markets,'' says de Haast of the pitfalls of investing in the region.

"It's not a widely traded market, most of the assets are still held by the developers or related entities." He notes that much of the capital flow has been inter-regional, coming from Abu Dhabi and Qatar, while other investors are waiting for further distress, which has not been as prevalent as expected.

Green disagrees slightly. "The UAE is probably the most transparent of all the Middle East markets, but it's still developing, so there are some regulations and laws that could use a bit more focus,'' he explains. For example, UAE just recently implemented escrow accounts and is creating regulation to give transparency to maintenance fees at apartment buildings. The US has governmental concerns as well, but Dubai presents a different hurdle.

"There are different forms of government at work here, different processes for ensuring the consistent rule of law,' Chandan points out. "These are institutions that are unfamiliar, and that lack of familiarity constrains investment, particularly as it concerns development."

Dubai's limited economic diversity will help lead to an expeditious recovery, and that will once again open the door to investors looking for the next big thing. It will take time, but because of its infrastructure and unique position on the globe, Dubai is poised for a comeback. "Dubai is not going to get back to double-digit growth any time soon,'' Green says. "But we'll probably see growth in early 2011.

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