Diversifying sources of office space demand

By Alice Tan

/ Knight Frank |

February 15, 2016 10:00 AM SGT

As traditional large-space occupiers cut back on office space requirements amid challenging business conditions, identifying emerging trends and achieving a more diversified profile can help landlords moderate vacancy risks.

Continued downward pressure in CBD and fringes

The weaker office rental performance in the last quarter of 2015 is a direct reflection of slowing office leasing activities and transactions, particularly for prime office space in the CBD. The flurry of downside factors that are magnifying since end-2015 — fears of global economic slowdown spurred by China’s slowing growth, declines in oil and commodity prices, equity market selloffs, coupled with weaker local economic growth— are weighing on market sentiment.

The capacity for new office space has waned as businesses mull over options to manage costs amid growing market uncertainty. A number of financial institutions, a key office occupier segment, have scaled back office operations in the CBD. Their consolidation particularly impacts Singapore’s office market as global financial institutions occupy a significant share of Grade A office space in the Asian financial hub.

Tenants in the commodities and trading segment as well as shipping services are also observed to be reducing their office space capacity. Consequently, prime office rents in the CBD saw steeper declines in the last three months of 2015 compared with the third quarter. Data from Knight Frank Research shows average rent for Raffles Place/Marina Bay Grade A+ and Grade A office spaces slipped 3.2%q-o-q and 1.0% q-o-q in 4Q2015, respectively (see table below).

Source: Knigh Frank Research

The influx of four million sq ft of new office space by end-2016, of which a significant proportion will come from the CBD, has been a key factor in the compression of top-grade office rentals in this district. The rental premium of Grade A+ office space in the Raffles Place / Marina Bay precinct compared with the traditional Grade A space in Raffles Place shrank from around 24.9% in4Q2014 to 17.7% in 4Q2015.Despite the narrowing rental premium, the absorption of Grade A+ available spaces did not keep pace with rising vacancy in the last three months of 2015, attributed in part to the year-end lull season, but more to the lack of new demand from enterprises. Pre-commitments of office space in upcoming new developments are observed to remain fairly muted at the start of 2016, yet there are optimistic expectations that the pre-commitment level could improve from mid-2016 onwards as some developments approach completion.

In view of potentially rising turbulence in global markets that could adversely impact growth prospects of various business sectors, demand for new office space is envisaged to be fairly modest, with about 2% annual growth in occupied stock island-wide. Coupled with the impending large supply of new office developments in the CBD by this year-end, prime office rentals are thus projected to decline by 7% to 10% y-o-y in 4Q2016.

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What are the potential bright spots for office demand?

Looking ahead for 2016, the key office occupiers from the finance, oil and gas, and shipping industries are likely to face stronger headwinds against the backdrop of weakening business conditions and greater market volatility. Demand for new office space from these tenants is envisaged to be slow, thus the search for other tenants from a diversified pool of industries becomes essential for maintaining building occupancy.

To take up the slack in Grade A office demand from banks, landlords could rely on a mixed bag of tenants.

Other industries that are likely to remain active in the office leasing market in 2016 include:

• Insurance

The global and regional insurance business has been expanding over the last three years, spurred by the rising need for insurance products and services, from both businesses and consumers. Insurance companies, especially enterprises that originated in Asia, are likely to expand their global footprint especially in the region within the next five years. This bodes well for office demand from this industry group as Singapore’s coveted status as a global city and financial hub provides favourable conditions for insurance companies to set up shop here.

• Technology, Media & Telecommunications (TMT)

Notwithstanding their recent and impending moves to business park spaces, with the relaxation of regulations for e-commerce trades to take up such spaces, established TMT enterprises are potentially still setting their sights on prime office spaces in the city centre. As part of talent acquisition and customer outreach strategies, TMT tenants could search for regional headquarter, front-of-house office space in the CBD, while having large R&D and backroom operations in business parks in city fringes.

• Serviced offices and co-working spaces

With the growing popularity of shorter-term and transient usage, which has been propelled by dynamic business conditions, disruptive technologies and changing work behaviours, serviced offices received strong take-up from end-users and have been expanding their presence in the city centre, fringes and even the suburbs. They are likely to remain active in office space searches. Co-working spaces, which started in western work cultures and has permeated Asian workplaces in recent years, is growing in popularity around the world.

Co-working spaces offer short-term use for end-users who are typically independent and not employed by the same organisation. Such spaces embody a work style that features a shared working environment and are suitable for entrepreneurs, freelancers and startups looking for inexpensive office space. Co-working spaces, usually tastefully designed to include cosy communal areas and ample facilities, function like “rental” business studios, bringing in a diversified community and encouraging interactions and collaboration among like-minded individuals or companies. Such a flexible co-working environment that also offers a strong social aspect appeals to the “small customer or small group of customers”, a key target market of office space end-users that is set to grow in the near to medium term, vis-à-vis the likelihood of downsizing of large corporations and rising entrepreneurship.

Alice Tan is director and head, consultancy and research, at Knight Frank (Singapore)

This article appeared in The Edge Property Pullout, Issue 715 (February 15, 2016) of The Edge Singapore.

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