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The ambitious vision transforming Saudi Arabia’s capital into a global metropolis is facing an unexpected hurdle: its own success.

The Saudi government’s focus on diversifying the economy through mega- and giga-projects has stimulated increased demand for office spaces and residential units, leading to a major “capacity crunch” that is driving up costs and potentially exacerbating the housing shortage.

Construction Costs Soar in Riyadh

According to a recent report, Riyadh now ranks as the Middle East’s most expensive city to build in, with construction costs averaging $2,593 per square meter – significantly higher than other regional players like Dubai ($1,874) and Abu Dhabi ($1,844).

This surge in costs is having real-world impacts on the Saudi capital’s development trajectory. With resources being diverted to these large-scale developments, there is a possibility of affordable housing projects becoming less feasible.

The HQ Mandate: A Double-Edged Sword

The Saudi government’s recent headquarters (HQ) mandate, requiring international companies to establish regional headquarters in the Kingdom to be eligible for government contracts, has further intensified demand for both commercial and residential real estate in the capital.

While this policy is designed to boost Riyadh’s status as a business hub, it has also created a ripple effect in the real estate market, with developers scrambling to meet the needs of incoming businesses and their employees.

A Shift in Housing Supply

However, there is a glimmer of hope. The market is evolving to meet the demand for affordable housing. Supply is reportedly shifting towards smaller units such as apartments and townhouses, helping developers “keep prices reasonable.”

This trend could provide some relief, particularly for young professionals and small families who have been priced out of larger properties.

Addressing the Housing Crunch

The Saudi government has taken proactive steps to address the years-long housing crunch. Initiatives by the Ministry of Municipal, Rural Affairs, and Housing (MOMRAH) in the northern parts of the city are exploring different construction methods and regulations to balance affordability with quality development.

As Riyadh continues its ambitious journey towards becoming a regional hub, the challenge of balancing mega-project development with affordable housing needs remains at the forefront. The coming years will test the city’s ability to innovate, adapt, and grow sustainably.