Share:

Navigating the shifts in commercial landlord-tenant dynamics

Christine Li • 09/09/2020

Tenants are demanding more flexibility as the office market softens.

 

The Singapore office market has steadily shifted from a landlord-friendly to a neutral tenant-friendly market as leasing activity continues to soften.

It joins several other markets across the Asia Pacific region which have now become more tenant-friendly. What has changed in the Singapore commercial leasing market that has led to the shift?

Home for longer

Working from home has become the default mode for most corporate occupiers. Many are operating at less than the maximum employee quota, preferring to take a conservative view on staff numbers. What this means then is that the Singapore office market has entered into a prolonged period of work from home which may extend to the end of the year at the very least.

Over the medium term, there is the threat of a second wave of infections leading to a second phase of induced halt in business operations and decision making.

As corporate occupiers stare at the prospect of office space remaining largely under-utilised, the knee-jerk reaction would be to cut back on footprint if conditions allow.

In the immediate to short term, the market is expecting a fraction of space to be returned vacant when occupiers renew their leases.

Many occupiers are taking the opportunity to review their footprint needs, evaluating how they utilise the space and assessing different buildings for their ability to cater for more flexible work arrangements.

For a large portion of corporate occupiers, cost containment and capital preservation have become a priority so where it is possible, they will look to consolidate space.

If a lease is coming up for renewal, there is a high chance they will look to return some space while they take advantage of a rental market that is facing pressure to explore other locations.

Large tech firms have already made public commitments, with Twitter and Square announcing that all of their employees would be able to work from home indefinitely, while Facebook unveiled a plan for up to half of its 48,000 workers to telecommute permanently within the decade.

Similarly, the banking and finance industry has forecast that a significant portion of its work force can operate remotely, leading many firms to re-evaluate their space needs going forward.

Smaller fit-for-purpose offices

While the operational shift to work from home is the default, it is not expected that this is the right model for every company and industry.

People by nature need and want to connect, both with clients and with colleagues. The result is that real estate will evolve into something that is different from in the past.

Previously the corporate office was "home base" where all functions reside. What will emerge in the future is the corporate office will be more tailored to the work that corporations do.

This will mean that certain functions will still be centralised, but many other functions will be established as "fit for function" - client interfacing, touch down, collaboration.

These functions will be in areas that match the need. Some will be in central CBD, others may be more dispersed depending on staff catchments and logistics.

As corporations embark on this journey, the key drivers of real estate remain location, logistics and cost.

But what will soon have a greater say is the environment that corporations create. If people are not going to the office as frequently, they want the experience to be more impactive than just functional.

This will see companies focus on a new set of drivers: including wellbeing, intelligent building management, safety management and of course amenities.

With a workforce that is now more mobile than ever the office strategy will become a key pillar to attract and retain talent.

Office rents moderating

The office market had just reached a cyclical high when it entered Covid-19. Grade A office rents tracked by Cushman & Wakefield Research only rose by 2.8 per cent to S$10.66 per square foot (psf) in 2019, with the bulk of the gains recorded mainly in the first three months of last year.

Rents have started to soften with the Grade A CBD rent moderating by 2.7 per cent to S$10.37 psf per month in the first half of 2020.

Although rentals have not dramatically adjusted, as demand falls and new supply is emerging, landlords will have to compete to attract and retain tenants.

Landlord-tenant dynamic

Against this backdrop, landlords are responding by sharpening their focus on client needs.

Some landlords are proactively engaging with tenants on their needs, to identify who is recession-proof and who might be more vulnerable. The net result of that is the landlord-tenant relationship will by necessity become more fluid. This is not an easy shift for landlords.

Whilst tenants are demanding more flexibility, real estate and its financial underpinning are based on long-term economics. To account for the evolutions of the landlord-tenant relationship, the emergence of co-working or club space is where both parties can find a happy medium.

With many buildings having co-working providers as tenants, landlords are becoming directly involved.

With CapitaLand and its "Bridge+" co-working solution or "The Bay" which is being introduced by Raffles Quay Asset Management, landlords now have the tools to respond to the flexibility needs of their occupants.

 

The above article originally appeared on The Business Times on 08 September 2020.

RElated Insights

main streets across the world 2019
Research • Investment

Main Streets Across the World 2019

The World’s Most Expensive Shopping Streets Revealed
Christine Li • 13/11/2019
Commentary on URA Q2 2020 office and retail statistics
Insights • Occupier

Commentary on URA Q2 2020 Office and Retail Statistics

Office prices in Singapore continued to decline in Q2 2020, marking the fourth consecutive fall in office prices since Q3 2019. Meanwhile, Central Region retail prices and rents fell by 1.5% qoq and 3.5% qoq respectively in Q2 2020, reflecting the disruption of COVID-19 on tenant sales and footfalls.
Xian Yang Wong • 28/07/2020

Related Stories

Ascott-Raffles-Place-story-thumbnail
Ascott Residence Trust • Hospitality & Tourism
Learn More
Drones Story Card Image
Singapore Sports Hub • Information Technology
Learn More
Carbon Credits through Clean Development Mechanism (CDM), Verified Carbon Standard (VCS) & Gold Standard (GS) programs
Town Councils • Energy
Learn More