Time of plenty in office rental market

THE Singapore office rental market has been languishing amid a ramp-up in new completions and weak demand.

Quite a common view held by some landlords (including office Reits), as well as analysts, is that things will start to improve in 2018 and beyond when the supply of new completions will be "very limited".

Let's take a closer look at the supply.

Approximately 1.8 million sq ft net lettable area of offices were completed in 2016 - in projects such as Guoco Tower, SBF Center and Duo Tower. In 2017, another 3.1 million sq ft office space is expected to be ready from projects such as Marina One, UIC Building, Arc 380 and Vision Exchange, based on data from JLL.

In 2018, some 1.6 million sq ft of office space will be generated from the completion of Frasers Tower, Robinson Tower and Paya Lebar Quarter.

2019 appears to be the year when there will be a slowdown, with just around 300,000 sq ft slated to finish.

However, the relief is expected to be short-lived. Supply could build up again from 2020 when projects such as the redevelopment of the CPF Building in Robinson Road and Golden Shoe Car Park on Market Street, along with IOI Properties Group's project on the white site along Central Boulevard and Far East Organization's Woods Square in Woodlands Regional Centre, are completed.

JLL's figures show that the quantum of offices for completion during this period will exceed three million sq ft.

In addition to the possibility of this new wave of office space completions from 2020, there are also issues about demand, which has slowed significantly since 2014 - amid a slowing economy, European and US financial institutions scaling down their operations, the crash in oil prices (and consequently the rout in the Singapore offshore and marine sector) and sliding commodity prices.

In the first nine months of 2016, net islandwide office demand, as reflected in change in occupied space, was just 280,000 sq ft, according to Urban Redevelopment Authority data.

Net demand has been declining in the past five years since the recent peak in 2011, when the figure was 2.3 million sq ft. This eased to 1.9 million sq ft in 2012, 1.3 million sq ft in 2013, 775,000 sq ft in 2014 and 667,000 sq ft in 2015.

There was some buzz in 2016 in the office leasing scene - but this involved mostly a flight-to-quality movement by tenants to new projects rather than expansion. Tenants were drawn by the attractive rental terms dangled by landlords of new developments who were eager to start building up occupancy amid a weak economy. Another incentive for tenants to relocate to newer office towers is that these feature bigger floor-plates, allowing a company to house its operations over fewer levels and resulting in more efficient use of space.

When these tenants start to relocate to their new premises from the middle of this year, vacancies are expected to rise in older buildings. Will there be sufficient growth in net office demand to backfill the older office stock - before the next wave of new completions begins in 2020?

There has been much hype about the tech sector being a growth engine for office demand but thus far, it has not been able to make up for the slack in demand from banks and financial institutions - traditionally the major occupiers of central business district office space. In any case, expansion of tech companies may not necessarily benefit office demand as they would qualify to use other types of space such as business park-zoned facilities.

An example would be Google's relocation to Mapletree Business City II in the Pasir Panjang area from CBD offices at Asia Square. Data centres for cloud computing needs may be what tech companies may require to host their expansion, rather than office space.

Some analysts are debating whether the Trump administration's policies in the US will reduce regulatory restrictions on banks and put them on the expansion path again. If this materialises, this could help revive a traditional demand source for office space here.

What is fast gaining traction are technological changes and new ways of working, such as flexible/agile office formats, which reduce demand for office space per employee.

This happens for a few reasons. One, because of technology, you do not have to work from the office all the time. Two, with cloud computing, you do not need so much physical filing cabinets. Research has shown that when companies set up shared offices and new ways of working, they can cut down their space usage by about 30 per cent, notes Edmund Tie & Company chief executive Ong Choon Fah.

In a traditional office set-up, the seating ratio is one person to one workstation. In a flexible format where there is no fixed seating and workstations are replaced with workbenches, seating efficiency increases to 1.4 persons to a seat.

But the saving does not arise just from putting more staff on seats. Efficiency of function rooms also increases; instead of having separate rooms for trainings, meetings, etc which are typically used less than 30 per cent of the time, rooms are now designed to be multi-purpose.

Even after catering for different areas for activity-based working in an agile office - a coffee bar or dining space for instance that can also double as a work area; quiet rooms for people who want to focus; and lounge areas for those who want to collaborate and need some buzz - a space saving of about 30 per cent is achievable for most companies.

Despite these trends, which will reduce physical office space requirements per person, it is not necessarily all gloom and doom for office landlords. To attract millennial talent, who find it more fun to be in a flexible office environment, with all its trappings - companies are willing to move to better-spec space with higher per-square-foot rents as this will be offset by a smaller footprint, says Mrs Ong.

A brave new world awaits office landlords.

Source: Business Times, 3 Jan 2017