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A Challenging 2020 Ahead in APAC Office Markets But Greater Opportunities for Some Occupiers

Geraldine Cheong • 24/03/2020

Markets with limited supply, such as Singapore, Taipei and Ho Chi Minh City will be less severely impacted from the outbreak

Cushman & Wakefield expects greater opportunities for occupiers despite a challenging 2020 ahead resulting from the COVID-19 outbreak. In an update on the office occupier market across the Asia Pacific, the firm expects that an overall economic slowdown in Asia Pacific appears inevitable in 2020, but some occupiers will likely enjoy declines in rental levels and enhanced lease terms.

The COVID-19 pandemic has exacerbated office market cycles, particularly in those markets where availability has been rising. As a result, key markets in Asia Pacific will turn more occupier-friendly. As landlords in some markets scramble to protect long-term tenant relationships and defend against increasingly attractive incentive packages from their competitors, the negotiation ball is now more firmly in the occupiers’ court.

Singapore’s tight office supply keeps rents steady for now

Despite lower market confidence, landlords have been able to hold their rents steady for the moment due to tight vacancies and limited upcoming supply. An annual average of 700,000 sf of new projects will be completed over 2020-2021. This is 42 per cent lower than the historical average of 1.2 msf of new supply injected annually over the past decade. The supply crunch will only ease in 2022 when 1.9 msf of prime space from Central Boulevard Towers and Guoco Midtown are completed.

Christine Li, Head of Research, Singapore and Southeast Asia said “Although only a few new projects are completing over the next few years, pre-leasing activity has been slow. Landlords of buildings under construction have been holding rents firm to take advantage of the rental upcycle at the expense of higher pre-commitment rates. It remains to be seen if landlords of these upcoming projects will take decisive action to boost occupancy rates in time”

Global economic and geopolitical uncertainties are taking a toll on the ability of companies to secure budgets for relocation and expansion, limiting the demand for office space. While office-using employment is expected to grow at a slower pace over 2020-2021, office leasing demand will continue to be mainly driven by finance, tech, and professional services firms.

Mark Lampard, Head of Regional Tenant Representation said “Global corporates continue to have a very positive view on Singapore. The speed and effectiveness by which the government has responded to the current Covid 19 challenge is re-enforcing the belief that Singapore is an excellent market by which to be based. The benefits of our infrastructure, legal framework and tax systems are now further buffeted by Singapore being viewed as a global leader in providing safe, responsive and resilient environment. The virus may result in a short pause but there is a belief that firms will resume their growth plans when the virus blows over. Between now and then, landlords and co-working operators will need to cater for the short term needs of tenants as they navigate the upcoming months.”

Going forward, growth in Grade A CBD rents is expected to moderate as the global economy continues to face headwinds from the unrest in Hong Kong and the on-going U.S.- China trade war. In addition, the COVID-19 pandemic has taken a severe toll on economic activity due to the disruption of supply chains and travel across the globe. These headwinds will result in slower growth in the US and Eurozone, with a potential U.S. and global recession in 2020. Nevertheless, the period of rental moderation will provide opportunities for forward-looking tenants to adopt a flight-to-quality strategy by locking in long-term leases at favourable rates in prime buildings, in anticipation of a ramp-up of hiring in subsequent years when the global economy recovers. Post-2021, office rents are projected to recover as Singapore remains an attractive destination for regional headquarters.

James Shepherd, Head of Research, Asia Pacific, stated: “As seen in all major territories, governments and central banks around the region have been responding to the situation with policy measures and financial aid to mitigate the economic impact. With China now appearing to be succeeding in controlling the outbreak at home, the World Health Organization believes that it is still possible to change the trajectory of the pandemic.

Assuming this scenario holds, and the global economy experiences a stimulus-fuelled rebound, we can expect office leasing activity to pick up in H2 2020 and beyond as normal business activity gradually resumes. Although some local markets have started to show signs of recovery, global economic headwinds are likely to temper this.”

In Greater China, an influx of supply had recently prompted a downward rental trend in Shanghai, Beijing and Guangzhou. Given the impact of COVID-19, rentals are expected to slide further. For Hong Kong, the outbreak deals a second blow to a property market already weakened from social unrest. The premium office market is expected to remain under pressure over the near-term.

Rental growth is likely to be weak in Sydney, Australia, over 2020 due to the economic impact of the pandemic. However, relatively muted supply and low vacancy suggest growth can return relatively quickly with economic recovery.

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