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Tight Office Supply Leaves Corporate Occupiers with Four Options

Mark Lampard • 14/01/2019

Singapore’s office leasing market transitions into 2019 against a severe dearth in office supply. Marina One and Frasers Tower, the only two buildings delivered between 2017 and this year, have been largely leased. Furthermore, occupiers will need to wait until 2020 for any significant new Grade A sector office supply.
This demand-supply imbalance raises major challenges for any corporate occupier mapping out a cost-effective premises plan. It is rare for any finance manager to factor in a 20%+ increase in budget in occupancy costs. Under such tight office supply conditions, in a landlords’ market, a few key trends will emerge in 2019:

Key Trends in a Landlords’ Market

The largely static office supply market presents occupiers with four options:

Do more with less

To stay on in a Grade A location. Occupiers are exploring ways to densify office spaces. These include putting people on flexi hours, or reduce desk size. As a result of this they are essentially carving out a smaller space with the same budget.

Move to cheaper real estate within core CBD

This may not be easy. Occupiers moving from a Grade A to Grade B piece of real estate will have to grapple with some key drawbacks. These could include limited floor plate size, low ceiling heights, or older, less energy efficient air-conditioning systems. Consequently Grade A occupiers tend not to shift to lower quality real estate.

Explore office supply further afield

Occupiers operating at an optimal office size who cannot reduce their footprint further will be pushed further out from the CBD. In some cases, businesses will be forced to split business functions and explore business parks alongside city fringe developments. Paya Lebar Quarter is a case in point. As a result of tightening office supply in 2018, several businesses including Great Eastern, NTUC Income, and SMRT announced they would be moving into Paya Lebar Quarter in 2019.

Split business functions across geographies

Corporate occupiers have the option to move certain functions outside of Singapore. This trend began with manufacturers moving out of Singapore to lower costs some years ago. Since then, the lower cost markets of India, Philippines, and Malaysia have positioned themselves as alternative sources of talent for corporates. As a result, corporates now have the option to split business functions across geographies. Many, for example, hub core functions in Singapore. This allows them to leverage the Republic’s infrastructure, robust tax, and legal framework, all whilst making use of labour in cheaper markets.

Tech and Wealth Management: Key Demand Drivers

Singapore and Southeast Asia is shaping up to be the next battleground for global tech giants including Alibaba-backed Lazada, Google and Facebook. Google and Facebook announced they were setting up data centres in the Republic this year. The confidence tech companies have in Singapore will keep demand for office supply healthy.

Growing Asian wealth is now a key revenue driver for financial institutions looking to access funds awash in Asian markets. Groups like Julius Baer, UBS, HSBC and other domestic banks are sharpening their focus on the wealth management business. whilst the traditional trading and lending businesses continue to right size.

Corporates Will Want More Flexibility in Premises Planning

The rise of the millennial workforce is shaping the future of work and technology is enabling different ways of working. Above all, millennials want to work in an interactive, less rigid environment that fosters collaboration and innovation.

In response, corporates have begun to work with workplace consultants to curate work spaces, to explore a mix of serviced offices and co-working spaces in a bid to attract and retain talent. The upshot of this is the increased flexibility that employers wield in managing cost. However, it also places pressure on landlords to support this to keep occupancy rates healthy.

No one would have predicted the rise of Lazada. In a short span of two years they renewed and expanded their space by 3.6 times in AXA Tower. They now occupy approximately 109,000 sq ft in total. Neither could we have seen coming KKR’s $220m investment in Singapore’s Property Guru, driving inorganic growth opportunities. The fluid nature of business points to the need for landlords to be flexible in the expansion or reduction in occupier space.

This article first appeared in EdgeProp on December 10, 2018 under the headline “Four options for corporate occupiers in the face of tight office supply”.

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