SINGAPORE (EDGEPROP) - At the height of the Covid-19 pandemic in Vietnam there was a pause in market activity, but momentum very swiftly gathered speed post lockdown. Net absorption in the Grade-B office segment was over 21,000 sqm (226,050 sq ft) in 2Q2020, which is above the three-year aver- age of 17,000 sqm (182,993 sq ft) per quarter. Net absorption of Grade-A office space suffered however, with negative take-up of 2,600 sqm (27,987 sq ft) last quarter. This is unsurprising with occupiers looking at cost, given the general slowdown in global trade and business.
The Vietnam office market is witnessing a perceivable flight to more economical, Grade-B office space, and this trend is expected to continue as occupiers become more cost-conscious. We had previously forecast a net absorption of 4,000 sqm (43,057 sq ft) in Grade-A office space in 2020; we are rewriting that to zero net absorption for the year.
However, we are not writing down rent projections as yet, given that the average vacancy rate of Grade-A office buildings is less than 3% in the CBD area of Ho Chi Minh City. The negative absorption of Grade-A space is led by smaller occupiers relocating to Grade-B buildings. We have yet to see large or anchor tenants doing the same.
Ho Chi Minh City is one of only four markets in Asia Pacific that remains landlord-friendly in the current climate, according to Cushman & Wakefield (Photo: Cushman & Wakefield)
Even though demand for Grade-A office space has declined 45% q-o-q, it is still relatively robust as no new supply is coming onstream until late 2021.
Only one Grade-B office building is expected to enter the market in Ho Chi Minh City’s core CBD area of District 1 this year. The rest of the new supply entering the market in 2020 are in the fringe or decentralised locations. As the buildings in decentralised areas command lower rental rates, this has naturally pulled down the overall market average rents. However, this supply is not expected to pull down the rents of the core CBD area.
This same trend was observed in the capital city of Hanoi for a number of years, with the flight to the new business districts in the west and midtown, which did not pull down the rents in the Hoan Kim area, the historical centre of Hanoi. Occupiers looking for cheap deals will have to sacrifice location. Few large relocations (defined as occupiers of more than 2,000 sqm space) are likely to occur for the rest of 2020 and early 2021, which means minimal impact on rents in the downtown core of Ho Chi Minh City. Discounts offered in the initial phase by the new buildings in the fringe locations will be reduced as occupancy picks up. Hence, it will be very much “business as usual” in the CBD area.
In fact, Ho Chi Minh City is one of only four markets in Asia Pacific that remains landlord- friendly in the current climate, according to Cushman & Wakefield’s latest analysis of office markets in the region. The other three are Bangkok, Metro Manila and Taipei.
OfficeHaus is located in the western suburbs, near Tan Son Nhat international airport and where many of the working population live (Photo: Cushman & Wakefield)
Occupiers in Vietnam have been keen to get back to the office and for business to return to the way it was before Covid-19. Indeed, we have witnessed very little change in operations due to the limited impact of the virus in the tier 1 cities. What we may see, however, will be the broader trend of global corporate occupiers doing a review of their occupancy needs once the pandemic is brought under control in other markets.
Landlords should therefore be prepared for more tenants requesting sub-leasing and lease assignment options as a review of operating cost is ongoing at the global level of most MNCs. Under Vietnam law, tenants are able to surrender and obtain re-grant of leases. But to date, we have seen only a few cases of occupiers looking to downsize their office as their headcounts become more remote and flexible.
Nevertheless, budget for high operating and capital expenditure among MNCs will remain tight until the global situation improves. Hence, landlords should not expect premium rents given that demand and take-up rates in new buildings remain a challenge. It used to be that co-working operators could pre-lease 30% of a building; that is no longer the case in this current climate. Pre-leasing and lease-up of new buildings are likely to take longer, and the best performance will be secured by the boldest and most commercial-minded landlords.
The, efficient design, use of contactless technology and large interconnecting floors makes OfficeHaus a test case for the post-pandemic world in terms of its lease-up performance (Photo: Cushman & Wakefield)
Rather than a broad-stroke rent reduction, landlords prefer to stay competitive, and structure ad hoc deals that hit the sweet spot with tenants. With sustainability and smart building efficiencies becoming increasingly important, there is a greater differentiation in rents between new and old buildings.
An example of a development that looks to be resilient even in the face of a pandemic is the new OfficeHaus located in the western suburb, near Tan Son Nhat international airport. A large percentage of Ho Chi Minh’s working population live in the area. Having an office there will help reduce commuting time for staff. The building’s efficient design, LEED Silver accreditation, use of contactless technology and large interconnecting floors makes it a test case for the post-pandemic world in terms of its lease-up performance.
As demand for quality space increases and companies focus on staff wellbeing, landlords and building owners will have to start improving their building design and interior spaces in order to stay relevant.
Vietnam remains a bright spot for Asia largely due to the government response to the pan- demic. While there was a pause at the height of the pandemic, rents are firm and demand remains healthy. Occupiers will be able to sniff out sweet deals offered by landlords in the new buildings in the city fringe, with only a few targeted for completion in the coming months. Well-managed buildings will be able to achieve rents at or above current market rates. There is continued growth and confidence in Vietnam despite the pandemic.
Alex Crane is managing director of Cushman & Wakefield Vietnam (Photo: Cushman & Wakefield)
Read Also: