Tech companies - the future drivers of office space demand

20160407-bt-tech-co-pic2 20160407-bt-tech-co-pic1 SINGAPORE'S Smart Nation journey is just beginning and will spur strong demand to improve existing and build new infrastructure and technical architecture.

Coupled with government initiatives, the Smart Nation will continue to attract more technology companies to be based in Singapore. The benefits of being in Singapore are well documented - its time zone, political stability, unique location, highly developed infrastructure and tax advantages make Singapore an ideal location for technology companies to set up their operations. Singapore is indeed one of the fastest-growing technology clusters in the world that attracts innovative businesses.

According to the Infocomm Development Authority of Singapore, the infocomm industry experienced an average 12 per cent of compound annual growth rate (CAGR) from 2009 to 2012, with growth gathering speed from 2012 to 2014 to register an average of 21.4 per cent CAGR.

The government's active backing of technology growth, along with healthy venture capital interest, is likely to help reinforce Singapore's attractiveness to technology tenants.

How technology companies in Singapore operate today

Singapore is the principal destination of many multinational technology companies for their Asia-Pacific headquarters.

Research by Colliers International showed that all of the global top 10 technology companies, which have a market capitalisation value of more than US$100 billion, have operations in Singapore. Among them, 70 per cent have their regional headquarters in Singapore. Indeed, 57 per cent of their regional headquarters are based in the CBD, while 43 per cent are located outside the CBD.

Outside this top-10 league, there is also a huge number of exciting, large and growing technology companies, such as LinkedIn, Twitter, Uber, Airbnb, Yahoo!, Amazon, eBay, and Expedia, operating in Singapore's CBD or the CBD fringe.

There are many similarities between the conventional space tenants such as banks and financial institutions, and technology tenants. Both the technology and non-technology tenants focus their efforts in attracting and retaining the best talent and managing their costs.

However, there are also differences that set them apart.

Very often, especially for the first wave of technology companies that arrived in Singapore more than 20 years ago, their operations and growth path were standard.

Many of them undertook significant amounts of technical research and development of hardware and software, hence typically requiring more space. As a result, they tended to occupy more affordable space in decentralised business parks outside the CBD.

The last few years have been a healthy progression for the technology sector, and along with it, their real estate needs. Technology tenants are more interested in locations suitable for their business needs, rather than concentrating on a particular type of building or even a specified rental bracket. These locations can differ, based on whether the firm is a first, second or third-generation technology firm.

In terms of location, first-generation technology companies generally feel that they have established a strong enough brand to attract and retain staff. Therefore, they tend to remain in non-CBD decentralised locations, such as business parks which allow for greater R&D and technical functions if their business activities qualify for the permitted uses.

On the other hand, second and third-generation technology companies prefer to stay in core CBD locations, where good transportation and amenities such as restaurants, cafes and retail outlets are available. In these cases, they are able to establish their brands, attract and retain staff, but also to be close to clients and to service providers. Smaller startup technology companies generally gravitate towards the fringe areas of the CBD due to cost constraints.

In terms of building type, first-generation technology companies prefer premium-grade and Grade-A space in business parks, whereas second-generation technology companies prefer the premium-grade and Grade-A office space in CBD buildings.

While established technology occupiers have the power to widen their choice of office accommodation, the same cannot be said for third-generation technology companies and startups. Many will consider secondary space or shophouses from a cost angle, while promoting a young, funky and less corporate image.

What is particularly encouraging is that the Singapore office market has adapted well to this new demand from technology tenants. However, there is increasing evidence that the real estate requirements of these innovative companies will continue to evolve along with their business models.

Many technology tenants are experiencing strong growth in headcount. For example, Google's Asia-Pacific business headquarters in Singapore started with only eight people in 2007 and has expanded to more than 200 employees by 2015. More recently, Google also announced the setting up of a large engineering hub in Singapore.

As they grow, some companies may consider expanding into business parks to allow for more R&D and data analytics functions, while others expand organically within the buildings they are currently in. Another technology company, LinkedIn, recently expanded its office within the same building at Marina Bay Financial Centre Tower 2.

As a sizeable amount of premium-grade and Grade-A supply in the CBD (approximately 3.58 million sq ft) will be coming onto the market later this year, competition to attract and retain tenants will intensify. The opportunity to take up quality office space in locations previously deemed too expensive will look viable for technology occupiers.

Technology companies could further drive demand for office space

The wave of demand, underpinned by large technology groups as well as small to medium-sized players, will be welcomed by commercial property landlords, as they struggle with falling space requirements from other business sectors.

Understanding how the technology sector is evolving is vital, whether for developers looking to build the most desirable product, for investors appraising tenant demand, or for businesses seeking to provide attractive working environments for their employees.

Landlords, in particular, will need to understand the opportunities that expansion in this sector offers.

Singapore's technology and creative sectors are changing the way that people work. Compared to other tenant types, technology companies have a strong focus on their workplaces - to attract highly creative, and typically, younger employees. Such tenants have a strong drive to keep things as flexible as possible, since they are looking for lifestyle and wellness to be part of the work environment, such as collaborative working areas, breakout zones and gaming areas where employees can brainstorm ideas.

The technology sector will continue to be one of the dominant sectors in Singapore. Indeed, it could possibly be the next real driver in the office space market. Therefore, landlords should continue to embrace this sector and be alert to its needs. Those that currently have technology tenants in their existing portfolios should engage these tenants to fully understand their needs, while those delivering new or refurbishment schemes should consider a more bespoke fit-out that sits well with them.

While large technology companies are generating a lot of excitement in the office market, the sector is also sustained by small to medium-sized companies as well as startups which will remain critical to this sector's success and continued growth.

Given the government's support of the technology sector, the office space market is likely to continue to benefit from a strengthening technology sector.

If Singapore were to become the future Silicon Valley and the world's first Smart Nation, the environment must be conducive for the expanding companies to move out of startup incubators and into modern offices or business parks. The technology industry will undoubtedly also generate spin-offs for other parts of the Singapore economy.

Source: Business Times, 7 Apr 2016